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FIRPTA requires buyers to withhold 15% of the property’s gross sale price, but that withholding is a tax deposit, not your final tax bill.
Foreign sellers pay capital gains tax on their actual net gain, using the same long-term and short-term capital gains rates that apply to US taxpayers.
Excess FIRPTA withholding can be recovered by filing Form 1040-NR after the sale or reduced in advance through a Form 8288-B withholding certificate.
The two costs that surprise foreign sellers most often are depreciation recapture and the time required to receive a FIRPTA refund.
Table of Contents
Do foreign nationals pay capital gains tax on US property?
Yes. Foreign nationals generally pay US capital gains tax when they sell US real estate at a profit.
One area that causes confusion is the difference between FIRPTA withholding and capital gains tax. FIRPTA requires a portion of the sale proceeds to be withheld at closing, while capital gains tax is calculated later based on your actual taxable gain. The amount withheld under FIRPTA is not automatically the amount of tax you owe.
Disclaimer: This article is provided for educational purposes only and does not constitute tax or legal advice. Capital gains tax, FIRPTA withholding, depreciation recapture, and treaty-related issues depend on your specific circumstances. HomeAbroad can help connect foreign investors with experienced cross-border CPAs and tax professionals as part of the property financing and investment process.
HomeAbroad has helped finance US investment properties for more than 500 foreign national investors from over 40 countries. A question that frequently comes up when investors prepare to sell is whether FIRPTA withholding represents their final tax bill.
The actual tax depends on factors such as your gain, holding period, depreciation claimed during ownership, and any deductions available under US tax law. In many transactions, the tax owed is lower than the amount withheld at closing, which is why some foreign sellers qualify for a refund.
What you actually pay: capital gains rates for foreign sellers
Foreign nationals do not pay a special capital gains tax rate when selling US real estate. Under US tax law, gain from the sale of a US real property interest is generally treated as effectively connected income (ECI) and taxed using the same capital gains rate structure that applies to US taxpayers.
Long-term vs. short-term capital gains
The amount of tax you pay depends largely on how long you owned the property before selling it.
Properties held for more than one year qualify for long-term capital gains treatment. For 2026, long-term capital gains are generally taxed at 0%, 15%, or 20%, depending on taxable income. Properties sold after being held for one year or less are subject to short-term capital gains tax, which is taxed at ordinary federal income tax rates ranging from 10% to 37%.
For most foreign investors selling profitable rental properties, the long-term capital gains rate applies because investment properties are typically held for multiple years before sale.
Steven Glick
Director of Mortgage Sales · HomeAbroad
Many investors focus on the amount withheld at closing. The conversations usually change once they see how factors like ownership period and property history affect the final calculation.
Depreciation recapture: the surprise cost
Depreciation recapture is one of the most overlooked parts of selling a US rental property.
While you own a rental property, depreciation deductions can reduce taxable rental income each year. Those deductions provide a valuable tax benefit during ownership, but they also reduce the property’s tax basis. When the property is sold, the IRS generally requires a portion of those deductions to be recaptured and taxed.
For real estate investors, this is commonly referred to as unrecaptured Section 1250 gain and can be taxed at rates of up to 25%.
As a result, two investors with identical sale prices can face different tax outcomes depending on how much depreciation was claimed during ownership. This is one reason the taxable gain reported on a sale is often higher than investors initially expect.
For example, an investor who purchased a rental property for $500,000 and claimed $80,000 in depreciation deductions would generally have a lower adjusted basis at sale. That lower basis can increase taxable gain and create depreciation recapture that many sellers do not anticipate when estimating proceeds.
The NIIT exception in your favor
One area where foreign sellers may have an advantage over US taxpayers involves the Net Investment Income Tax (NIIT).
US citizens and tax residents may be subject to an additional 3.8% NIIT on investment income when their income exceeds certain thresholds. Nonresident aliens generally are not subject to this tax.
That means a foreign national and a US resident with the same property gain may not face exactly the same federal tax liability. While nonresident aliens remain subject to capital gains tax and depreciation recapture rules, the additional 3.8% NIIT generally does not apply.
Why FIRPTA withholding and capital gains tax are different
FIRPTA withholding is calculated using the property’s sale price. Capital gains tax is calculated using the seller’s actual taxable gain.
Because the two calculations use different numbers, the amount withheld at closing is often different from the amount ultimately owed to the IRS. This is why many foreign sellers qualify for a refund after reporting the sale and calculating their actual tax liability.
For example, a foreign investor who sells a property for $800,000 may have $120,000 withheld under FIRPTA at closing. The actual tax calculation is based on the investor’s gain, adjusted basis, depreciation history, and other tax factors. If the final tax liability is lower than $120,000, the excess withholding may be recovered through the IRS refund process.
If you need a detailed explanation of how FIRPTA withholding works, see our FIRPTA guide.
How to get your FIRPTA refund
In many transactions, the amount withheld under FIRPTA exceeds the seller’s final tax liability. When that happens, the excess withholding can generally be recovered through the IRS.
Recover after the sale
The most common way to recover excess FIRPTA withholding is by filing Form 1040-NR and reporting the actual sale of the property.
When preparing the return, the seller calculates the true taxable gain based on factors such as the property’s adjusted basis, capital improvements, selling expenses, holding period, and depreciation recapture. The FIRPTA amount withheld at closing is then credited against the tax liability shown on the return.
If the withholding exceeds the tax owed, the IRS issues a refund for the difference.
Reduce withholding before closing
Some sellers may be able to reduce withholding before the transaction closes by applying for a Form 8288-B Withholding Certificate.
Rather than withholding 15% of the gross sale price, the IRS can authorize a reduced withholding amount based on the seller’s expected gain and estimated tax liability. This can significantly improve cash flow, especially on higher-value transactions where the standard FIRPTA withholding would be substantially higher than the anticipated tax.
The key is timing. The application should be prepared well before closing because the IRS review process can take time.
The sellers who usually have the smoothest experience are the ones who start discussing FIRPTA planning before the property goes on the market. Waiting until the week of closing often limits the options available.
The timing reality
One of the most common questions foreign sellers ask is how long it takes to receive a FIRPTA refund.
The answer depends on several factors, including whether the seller has an ITIN, whether all required forms are filed correctly, and IRS processing timelines. In many cases, refunds can take several months after the tax return is filed. Missing documentation, filing errors, or delays in obtaining an ITIN can extend the process further.
For sellers who expect a significant difference between the FIRPTA withholding amount and their actual tax liability, planning early can make a meaningful difference. Having the necessary tax documentation in place before listing the property can help avoid delays and reduce uncertainty throughout the sale process.
Exit planning: legal ways to defer or reduce the gain
Tax planning for a property sale often starts long before a buyer is found. The decisions made during ownership can affect both the amount of tax owed and the options available when it’s time to exit the investment.
1031 like-kind exchange
A 1031 exchange allows qualifying investors to defer capital gains tax by reinvesting proceeds from the sale into another qualifying investment property. Instead of recognizing the gain immediately, the tax is deferred until the replacement property is sold in a taxable transaction.
For investors planning to remain active in US real estate, a 1031 exchange can be one of the most powerful tax-deferral strategies available. Learn more in our 1031 exchange guide and use our 1031 exchange calculator to estimate potential tax deferral benefits.
Installment sales
An installment sale allows a seller to receive payments over time rather than collecting the entire purchase price at closing. Because gain is recognized as payments are received, this approach may spread taxable income across multiple tax years.
Not every transaction is a good candidate for an installment sale, but it can be worth discussing with a qualified tax advisor when managing future tax exposure is a priority.
State taxes can also affect the after-tax outcome of a sale. While some states do not impose state income tax, others tax capital gains as ordinary income. Foreign sellers should evaluate both federal and state tax exposure when planning an exit strategy.
Timing the sale and managing losses
Holding a property for more than one year can make a significant difference because long-term capital gains rates are generally lower than ordinary income tax rates.
Investors should also consider the impact of capital losses. In some situations, selling a property at a loss or offsetting gains with other losses may reduce overall tax liability. When little or no gain is expected, a Form 8288-B withholding certificate may also help reduce FIRPTA withholding before closing rather than waiting for a refund after the sale.
Ownership structure matters
Ownership structure can affect tax reporting, estate planning, and long-term investment goals. Decisions involving LLCs, foreign corporations, trusts, or other entities should be evaluated before a sale is underway, since restructuring later can become more complicated and expensive.
The investors with the most flexibility at exit are usually the ones who considered their long-term strategy before they purchased the property. Financing, ownership structure, and exit planning often work best when they’re viewed together rather than as separate decisions.
Because ownership and entity planning can involve cross-border tax and legal considerations, investors should work with a qualified CPA or attorney before making structural changes. For a deeper discussion of treaty and estate-planning considerations, see our guide to US tax treaties and real estate investing.
Common mistakes foreign sellers make
Many costly mistakes happen long before a property reaches the closing table. The good news is that most of them can be avoided with advance planning and the right tax guidance.
Treating the 15% withholding as the final tax
Many foreign sellers assume the amount withheld under FIRPTA is the amount they ultimately owe. In reality, FIRPTA withholding is a prepayment against the actual tax liability calculated after the sale.
Fix: Estimate the expected gain before listing the property and understand how FIRPTA withholding compares to the likely tax owed.
Overlooking depreciation recapture
Investors often focus on capital gains tax while forgetting that depreciation claimed during ownership can create an additional tax liability when the property is sold.
Fix: Review your depreciation history with a CPA before calculating potential sale proceeds or expected tax exposure.
Waiting too long to file Form 8288-B
A withholding certificate can reduce FIRPTA withholding in certain situations, but it takes time to prepare and process. Waiting until the closing date approaches can limit available options.
Fix: Discuss FIRPTA planning as soon as you decide to sell, not after a purchase agreement is signed.
Not having an ITIN ready
Missing or delayed taxpayer identification documentation can slow the refund process and create unnecessary administrative delays.
Fix: Confirm your ITIN status early and resolve any issues before the property goes on the market.
Assuming a tax treaty reduces the tax
Many investors expect a tax treaty to eliminate FIRPTA withholding or significantly reduce the tax due on a property sale. For individual foreign sellers, that is generally not how US real estate taxation works.
Fix: Focus on the planning tools that typically have the greatest impact, including holding period, depreciation planning, Form 8288-B, and refund procedures.
Using a CPA without cross-border experience
US real estate transactions involving foreign owners often require specialized knowledge of FIRPTA, nonresident tax returns, treaty considerations, and international reporting requirements.
Fix: Work with a CPA or tax professional who regularly handles cross-border real estate transactions and foreign national investors.
The bottom line
Foreign nationals generally pay US capital gains tax when they sell US real estate, but the amount withheld under FIRPTA is not necessarily the amount ultimately owed. Your actual tax liability depends on factors such as the property’s gain, holding period, depreciation recapture, and other tax considerations.
Foreign sellers are generally subject to the same capital gains tax rates as US taxpayers, although the 3.8% Net Investment Income Tax (NIIT) typically does not apply to nonresident aliens. When FIRPTA withholding exceeds the actual tax owed, the excess can often be recovered through a Form 1040-NR filing or reduced in advance with a Form 8288-B withholding certificate.
The most effective time to think about taxes is before a property is listed for sale. Holding period decisions, ownership structure, exchange opportunities, and FIRPTA planning are often easier to address before a transaction is underway.
Whether you’re preparing to sell a property or planning your next investment, understanding the tax impact before closing can help you avoid surprises and improve cash flow. HomeAbroad can help foreign national investors evaluate financing options, connect with experienced cross-border professionals, and plan the next stage of their US real estate journey.
FAQs
Do foreign nationals pay capital gains tax on US property?
Yes. Foreign nationals generally pay US capital gains tax when they sell US real estate at a profit. The gain is typically taxed using the same long-term and short-term capital gains rules that apply to US taxpayers, although FIRPTA withholding and depreciation recapture can affect the amount collected and reported.
How do I get my FIRPTA withholding refund, and how long does it take?
If more tax is withheld under FIRPTA than you ultimately owe, the excess can generally be recovered by filing Form 1040-NR and reporting the actual gain from the sale. Some sellers may also reduce withholding before closing by applying for a Form 8288-B withholding certificate. Refund timelines vary, but many foreign sellers wait several months after filing before receiving a refund. Delays are commonly caused by missing documentation, ITIN issues, or IRS processing backlogs.
Is depreciation recapture taxed when a foreign owner sells?
Yes. Depreciation claimed while the property was used as a rental generally reduces the property’s tax basis and can create depreciation recapture when the property is sold. For many investors, unrecaptured Section 1250 gain may be taxed at rates of up to 25%.
Do nonresident aliens pay the 3.8% Net Investment Income Tax (NIIT)?
Generally, no. The 3.8% NIIT typically applies to US citizens and tax residents who exceed certain income thresholds. Nonresident aliens are generally not subject to the NIIT, which can result in a lower overall federal tax burden compared to some US taxpayers.
Can a tax treaty reduce my US capital gains tax?
For individual foreign investors selling US real estate, tax treaties generally do not reduce the US tax imposed on gains from the sale of a US property. Tax treaties may help address double taxation through foreign tax credits or other mechanisms in the investor’s home country, but they typically do not eliminate US tax on the sale itself.
Can a 1031 exchange help a foreign seller avoid FIRPTA?
A 1031 exchange can defer capital gains tax when all requirements for a qualifying like-kind exchange are met, but it does not automatically eliminate FIRPTA considerations. Foreign sellers considering a 1031 exchange should work with qualified tax and legal professionals to understand both the exchange requirements and any FIRPTA-related obligations that may apply to the transaction.
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