FIRPTA: Tax Withholding on the Sale of a US Property by a Non-Resident - Rates, Exemptions and How to Get a Refund

1What is FIRPTA, and to whom does it apply?

FIRPTA (Foreign Investment in Real Property Tax Act) is a mechanism in US law that requires the buyer to withhold tax at source when the seller is a “foreign person” selling an interest in US real property. Any Israeli investor who is not a US citizen or a US resident for tax purposes is considered a foreign person for this purpose.

The logic is simple: the US tax authority (IRS) has no way to collect tax from a seller who left the country with the money, so it requires the buyer to hold back part of the proceeds. If the buyer does not withhold, he himself may bear the tax. Therefore the title company or the attorney managing the closing (Closing) will insist on full withholding, unless an exemption or a certificate from the IRS is presented.

It is important to understand: the tax treaty between Israel and the US does not exempt from this tax. Under Article 7 of the treaty, income from real property, including gain from its sale, may be taxed in the state where it is located. Article 15 of the treaty expressly excludes gain from the sale of such real property from the general exemption on capital gains.

2How much tax is withheld on the sale of a US property?

The direct answer: 15% of the entire sale amount, unless the buyer is an individual acquiring the property as his residence. The withholding is calculated on the gross proceeds, before repayment of the mortgage and regardless of the gain. Someone who bought for $600,000 and sells for $620,000 may see $93,000 locked up with the IRS, although the gain itself is much lower.

3Is FIRPTA the final tax on the gain?

No. The FIRPTA withholding is only an advance payment. The real tax is determined in the seller's US tax return, according to the actual gain: the sale price less the purchase cost, the improvements and the selling expenses, plus the depreciation that was required over the years.

• Long-term capital gain (property held more than a year): taxed at rates of 0%, 15% or 20% depending on the level of taxable income. In 2025, for an individual, the 0% rate applies up to taxable income of $48,350 and the 15% rate up to $533,400.
• Gain attributable to required depreciation (Unrecaptured Section 1250 Gain): taxed at a maximum rate of 25%.
• Short-term gain (for example in a flip transaction): taxed as ordinary income at graduated rates, up to 37% (as of 2026).
• Net investment income tax (NIIT) of 3.8%: according to the IRS instructions, does not apply to non-resident non-citizens.
• State tax: most states also tax the gain, and some require withholding of their own in addition to the federal withholding. Rates and rules differ from state to state.

The practical implication: in many sales the 15% withholding is far higher than the final tax, especially when the gain is small, when there is a large mortgage, or when the property is sold at a loss. In such cases the whole question is how fast the money comes back.

4How do you reduce the withholding even before closing? Form 8288-B

The seller (or the buyer) can submit to the IRS an application for a withholding certificate (Withholding Certificate) on Form 8288-B. The certificate can set a reduced withholding when the maximum expected tax is lower than 15%, and can also exempt from withholding when there is no tax liability or when a nonrecognition provision applies.

• Timing: if the application was filed before closing and has not yet been decided, the buyer withholds the full amount but is not required to remit it immediately. In practice the money is held in trust by the title company, and it is remitted to the IRS (in the amount determined) within 20 days of the day the IRS sent the certificate or the denial.
• Processing time: according to the IRS, a decision is generally received within 90 days of receipt of all the required information. Field experience shows that it can take longer, so you file as early as possible.
• Identification number: a seller without a US identification number can attach to the application Form W-7 to obtain an ITIN. According to the IRS, an ITIN application filed together with an application for a withholding certificate is processed within 10 days of its receipt.
• Documentation: the application is based on a calculation of the expected tax, so you need purchase documents, proof of improvements, depreciation details and the sale contract.

5How do you get a refund of FIRPTA tax?

You file a US tax return for the year of sale and attach the stamped copy of Form 8288-A. The difference between the amount withheld and the final tax is refunded. This is the order of things:

1. The buyer submits to the IRS Form 8288 with the amount withheld, together with Form 8288-A for each seller, within 20 days of the date of sale.
2. The IRS stamps copy B of Form 8288-A and sends it to the seller. If the form does not show an identification number for the seller, the IRS will not send a stamped copy, but a letter asking the seller to obtain an ITIN.
3. The seller files a 1040-NR return for the year of sale and attaches the stamped copy B (or, if there is no such copy, substantial evidence of the withholding such as the closing documents). Someone with no wages in the US and no office there generally files by June 15 of the following year.
4. If a withholding certificate was received after the money had already been remitted to the IRS, an early refund application (Early Refund) can be filed without waiting for the annual return.
5. The IRS processes the return and refunds the difference. Timing varies, so it is worth filing early and in full.

6What happens when the property is held in an LLC?

The answer depends on the classification of the LLC for US tax purposes:

• Single-member LLC (disregarded entity): under the Form 8288 instructions, such an entity cannot be the “seller”, and the seller for FIRPTA purposes is the owner. If the owner is foreign, the buyer withholds as usual.
• LLC with several members (US partnership): the partnership itself withholds tax at source under Section 1446 on the share of the gain allocable to the foreign partners, so it is not required to withhold under the regular FIRPTA mechanism. The withholding derives from the gain and not from the price.
• Sale of the interests in the partnership (instead of sale of the property): separate withholding rules apply under Section 1446(f), which require special review.

7What happens on the sale from the Israeli side?

An Israeli resident is taxed in Israel on the gain from the sale of a property abroad, and receives a credit for the tax paid in the US. Land appreciation tax (mas shevach) does not apply, because the Land Taxation Law applies only to real property in Israel. The gain is taxed as a capital gain under the Income Tax Ordinance, for an individual generally at 25% of the real gain. Above annual income of ILS 721,560 (as of 2026) an additional surtax of 3% applies, and an additional surtax of 2% applies to capital income.

• The credit is given for the final tax only. The amount withheld under FIRPTA is an advance payment, so in order to receive a credit in Israel you need the US return and the final assessment. Under the rules in Israel, the credit is conditioned on a final tax that is not refundable, paid within 24 months of the end of the relevant tax year.
• The credit is limited to the amount of the Israeli tax on the same income, and an excess credit can be carried forward to the next five tax years.
• Depreciation: depreciation that was required in Israel over the years reduces the original cost balance, and therefore increases the taxable gain.
• The holding structure matters: if the property was held in an LLC for which a transparent track was not elected in Israel, the match between the US tax and the Israeli tax may be impaired.

8What should you do before signing a sale contract?

The sale of a US property begins with planning, not with closing. Before signing, we check with the US accountant the expected tax, decide whether to file Form 8288-B, make sure the seller has an ITIN or that such an application is filed together with the form, and draft in the contract the trust mechanism over the withheld amount. In parallel we coordinate with the accountant in Israel the reporting and the credit, so that the money does not get stuck on one side and the tax is not paid twice.

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The information in this guide is general in nature and does not constitute legal or tax advice on any specific transaction. Every transaction is assessed on its own facts.