What is FIRPTA withholding and how do Canadians reduce it?

Why the withholding is based on price, not profit

FIRPTA (the Foreign Investment in Real Property Tax Act) makes the buyer responsible for withholding tax when they purchase US real estate from a non-resident seller. The default rate is 15% of the gross sale price, applied whether the seller made a large gain, a small gain, or a loss. The buyer or, in practice, the closing agent or title company holds the funds back at closing and remits them to the IRS within 20 days.

This catches a lot of Canadian sellers off guard. A condo that sells for US$400,000 triggers US$60,000 of withholding even if the seller only cleared US$40,000 of actual profit after the original purchase price and selling costs. The withholding is a deposit, not the final tax bill, but it ties up cash for months if nothing is done before closing.

FIRPTA applies to individuals, but the same mechanics reach a Canadian-owned corporation or a share of an estate that owns US property, and joint owners are each treated separately for the residence-price tests below. The withholding obligation follows the closing, not the listing, so it does not matter how the property was marketed or how long it sat on the market. What matters is who signs as seller and what the buyer certifies about their own plans for the home.

When the rate drops to 10% or 0%

Congress built in relief for lower-priced homes bought as a residence. The rate steps down like this:

• the sale price is US$300,000 or less and the buyer signs a certification that they intend to use the property as a residence: no withholding at all;
• the price is between US$300,001 and US$1,000,000 and the same residence certification applies: withholding drops to 10%; and
• anything else, including investment or rental purchases and prices above US$1,000,000, stays at the full 15%.

The residence test looks at the buyer's plans, not the seller's, and the buyer has to intend to spend enough time at the property to qualify. A vacation condo bought purely as a rental by the new owner does not qualify, so many Canadian-owned rentals sell to buyers who keep the full 15% rate in play.

How Form 8288-B lowers the amount before closing

The more useful tool for most sellers is Form 8288-B, an application for a withholding certificate. Instead of accepting the flat percentage, you ask the IRS to approve a reduced amount based on your actual expected US tax on the sale, calculated from your cost, selling expenses, and any depreciation recapture. The application has to go in on or before the closing date, and the closing agent typically escrows the standard withholding amount until the IRS responds.

A few practical points make this work smoothly:

1. You need a US ITIN before the IRS will process the 8288-B, so applying for one early matters if you don't already have one.
2. The IRS review takes roughly 90 days as at the time of writing, so applying weeks before closing, not the day before, gives it a real chance to come back in time.
3. If the certificate does not arrive by closing, the escrow agent still holds the standard 15% until the IRS rules, then releases any excess.

A seller with a break-even or loss position, or one who owned the property for years and has modest gain relative to price, is exactly the profile where an 8288-B saves the most cash flow.

Getting the money back if you did not apply in time

If the full 15% (or 10%) was withheld and no certificate reduced it, the withholding is not lost. You report the actual sale on a US non-resident return, Form 1040-NR, for the year of the sale, calculate the real tax on the gain, and claim the withheld amount as a payment already made. Any excess comes back as a refund. Depreciation you claimed, or should have claimed, on a rental property is recaptured and taxed separately at up to 25%, which reduces the eventual refund compared to a property that was never rented out.

Some states add their own withholding on top of the federal amount. California and Hawaii are the two Canadian sellers run into most often, each with different rates and forms, so it's worth checking the specific state before closing rather than assuming federal FIRPTA is the only step. A state withholding certificate, where the state offers one, is a separate application from the federal Form 8288-B and runs on its own timeline.

None of this changes the Canadian side of the sale. It still needs to be reported on your Canadian return, with the purchase price, selling costs and proceeds converted using the correct exchange rate on each relevant date, and a foreign tax credit claimed for the US federal and state tax actually paid. Because the credit is capped at the Canadian tax otherwise owing on the same gain, over-withholding that is never recovered through a 1040-NR can leave US tax stranded with no matching Canadian credit to use it against.

How we handle FIRPTA withholding for clients

We start planning a US property sale months before closing, not after the offer is accepted. That means confirming whether an ITIN is already in place, estimating the actual US tax to decide whether an 8288-B is worth filing, coordinating with the closing agent so the paperwork lands on time, and preparing the 1040-NR the following spring to reconcile whatever was withheld. Our cross-border tax services cover the sale and the follow-up US and Canadian filings as one engagement.

Source: IRS — FIRPTA withholding.