Foreign Sellers of California Real Estate: FIRPTA and Form 593 Withholding Rules
A foreign person selling real estate in the United States can face substantial tax withholding at closing even when the seller's actual taxable gain is much smaller than the sales price.
For a foreign seller of California real estate, two separate withholding systems can apply to the same transaction. Federal withholding can be required under the Foreign Investment in Real Property Tax Act, commonly known as FIRPTA, while California can separately require real estate withholding reported on Form FTB 593.
Neither withholding amount is necessarily the seller's final income tax liability. Both systems generally function as tax prepayments that are later reconciled when the appropriate federal and California income tax returns are filed.
Because the default withholding calculations can be based on the sales price or amount realized rather than the seller's actual taxable gain, reviewing the transaction before closing can materially affect the amount of cash the seller receives from escrow.
For broader guidance on real estate dispositions, depreciation, California taxation, and other investor issues, see my Real Estate Tax Planning resource page.
Key Tax Takeaways for Foreign Sellers
- Federal FIRPTA withholding generally equals 15 percent of the amount realized, not 15 percent of taxable gain.
- The amount realized can include cash, other property transferred, and liabilities assumed by the buyer or to which the property remains subject.
- A special residence rule can reduce FIRPTA withholding to 10 percent when the amount realized is more than $300,000 but not more than $1 million and the buyer satisfies the residence requirements.
- FIRPTA withholding can be eliminated under the residence exception when the amount realized is $300,000 or less and the statutory requirements are satisfied.
- A foreign seller can apply for an IRS withholding certificate using Form 8288 B when the normal withholding materially exceeds the seller's maximum federal tax liability or another qualifying basis for reduction applies.
- The buyer is generally the federal FIRPTA withholding agent even when an escrow or settlement company performs the closing mechanics.
- California real estate withholding is not limited to nonresident sellers.
- California generally requires withholding when California real property is sold or transferred unless an exemption or alternative rule applies.
- The standard California sales price method is 3 1/3 percent of the sales price.
- California Form 593 permits an alternative withholding calculation based on estimated gain multiplied by the applicable maximum tax rate.
- Federal FIRPTA and California Form 593 withholding can apply at the same closing.
- A Section 1031 exchange, installment sale, entity ownership, missing taxpayer identification number, or prior depreciation can materially change the analysis.
What Is FIRPTA Withholding?
Internal Revenue Code Section 897 generally subjects a foreign person's gain from the disposition of a United States real property interest to United States income taxation.
Section 1445 provides the withholding mechanism commonly referred to as FIRPTA withholding. When a foreign person disposes of a United States real property interest, the buyer generally must deduct and withhold tax from the transaction unless an exception, reduced rate, or withholding certificate applies.
A foreign person for FIRPTA purposes can include a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate. A resident alien individual is not treated as a foreign person for this purpose.
When property is held through a disregarded entity, the owner of the disregarded entity is generally treated as the transferor for FIRPTA purposes.
How Much Is FIRPTA Withholding?
The general FIRPTA withholding rate is 15 percent of the amount realized.
This is one of the most important distinctions in the FIRPTA rules. The withholding is not generally calculated as 15 percent of the seller's taxable gain.
For FIRPTA purposes, the amount realized generally includes:
- Cash paid or to be paid to the seller, excluding stated interest
- The fair market value of other property transferred or to be transferred
- Liabilities assumed by the buyer
- Liabilities to which the property is subject immediately before and after the transfer
Example: FIRPTA Is Based on Amount Realized, Not Gain
Assume a foreign individual sells United States real estate for $1,200,000. For simplicity, assume the amount realized for FIRPTA purposes is also $1,200,000.
The seller has an adjusted tax basis of $950,000 and incurs $70,000 of selling expenses. Ignoring other tax adjustments, the economic gain is approximately $180,000.
The standard FIRPTA withholding is not 15 percent of the $180,000 gain. It is generally 15 percent of the $1,200,000 amount realized, or $180,000.
The withholding in this example equals the entire simplified economic gain even though the seller's final federal income tax on that gain may be substantially less.
FIRPTA Withholding Is Not the Seller's Final Federal Tax
The 15 percent withholding rate should not be confused with the income tax rate ultimately imposed on the transaction.
Final federal tax depends on taxable gain, adjusted basis, depreciation, holding period, property classification, depreciation recapture, applicable deductions, the seller's tax status, and other facts.
When Is FIRPTA Withholding Reduced to 10 Percent?
A special rule can reduce FIRPTA withholding to 10 percent when:
- The buyer acquires the property for use as a residence
- The amount realized is more than $300,000
- The amount realized is not more than $1 million
The reduced rate depends on the buyer's intended residential use of the property. It is not a general reduced rate for every foreign seller of residential real estate.
When Does the $300,000 FIRPTA Residence Exception Apply?
FIRPTA withholding is generally not required when one or more individuals acquire the property for use as a residence and the amount realized is $300,000 or less.
For this exception, the buyer or a member of the buyer's family must have definite plans to reside at the property for at least 50 percent of the number of days the property is used by any person during each of the first two 12 month periods following the transfer. Days when the property is vacant are not counted.
The actual buyer must be an individual for this residence exception.
| Amount Realized | Buyer Residence Requirement Satisfied | General FIRPTA Withholding |
|---|---|---|
| $300,000 or less | Yes | Generally no withholding |
| More than $300,000 but not more than $1 million | Yes | Generally 10 percent |
| More than $1 million | Residence rule does not reduce the standard rate | Generally 15 percent |
Can FIRPTA Withholding Be Reduced Before Closing?
Yes. A foreign seller can request an IRS withholding certificate when the standard FIRPTA withholding exceeds the appropriate withholding amount under the applicable rules.
Form 8288 B, Application for Withholding Certificate for Dispositions by Foreign Persons of United States Real Property Interests, is commonly used when the seller's maximum federal tax liability is substantially less than the normal withholding amount.
The IRS can issue a withholding certificate that reduces or eliminates withholding when the applicable requirements are satisfied.
When Can Form 8288 B Be Useful?
A withholding certificate can be particularly valuable when:
- The property has a high adjusted basis
- The taxable gain is small compared with the sales price
- The transaction produces a tax loss
- A nonrecognition provision applies
- The standard withholding exceeds the seller's maximum expected federal tax liability
- The transaction is structured as an installment sale and special withholding treatment is requested
Address Form 8288 B Well Before Closing
The IRS states that it will normally act on a complete withholding certificate application within 90 days after receiving all information necessary to make a determination.
The application should therefore be addressed as early in the transaction as practical rather than waiting until the final days before escrow closes.
What Happens if Form 8288 B Is Still Pending at Closing?
If a withholding certificate application has been submitted by the date of transfer, special timing rules can delay when the otherwise applicable withholding must be paid to the IRS.
A seller who applies for the certificate must notify the buyer in writing on or before the date of transfer that an application has been submitted.
A pending application should not be interpreted as automatically allowing the seller to receive the otherwise required withholding funds at closing. The buyer and closing agent need to coordinate the handling of the funds while the IRS application remains pending.
What Information Is Needed for a Form 8288 B Application?
A withholding certificate request based on the seller's maximum tax liability generally requires enough information to support both the property's adjusted basis and the expected federal tax calculation.
Depending on the transaction, the review can include:
- The signed sales contract
- Original acquisition closing statement
- Purchase price allocation
- Capital improvement records
- Depreciation schedules
- Cost segregation studies
- Prior Section 1031 exchange records
- Estimated selling expenses
- Expected amount realized
- Estimated taxable gain
- Depreciation recapture calculations
- Seller and buyer taxpayer identification numbers
- Other information supporting the requested withholding amount
A withholding certificate is therefore not simply a request asking the IRS to use a lower percentage. It is supported by a tax calculation and documentation showing why the normal withholding amount should be reduced.
Who Is Responsible for FIRPTA Withholding?
The buyer is generally the FIRPTA withholding agent.
An escrow company, title company, attorney, or settlement agent may handle the practical withholding and filing procedures, but use of a settlement agent does not automatically replace the buyer as the statutory withholding agent.
IRS Form 8288 instructions provide an example in which a settlement agent pays the seller's loans, withholds the FIRPTA amount, and distributes the remaining funds, while the buyer remains the withholding agent responsible for Forms 8288 and 8288 A.
Failure to Withhold Can Create Liability for the Buyer
A buyer who acquires a United States real property interest from a foreign person and fails to satisfy the applicable FIRPTA withholding requirements can be held responsible for the withholding tax, penalties, and interest.
What if the Seller Is Not Actually a Foreign Person?
FIRPTA withholding generally is not required when the seller properly certifies that the seller is not a foreign person.
The certification is made under penalties of perjury and generally includes the seller's name, address, and United States taxpayer identification number. A valid Form W 9 can serve as a certification of nonforeign status in appropriate circumstances.
The certification can also be provided to a qualified substitute under the applicable regulations.
This issue can arise when a seller has a foreign mailing address, foreign owners, an entity structure, or immigration facts that cause the closing agent to question whether FIRPTA applies.
What Federal Forms Are Used for FIRPTA Withholding?
The principal forms include:
| Form | Purpose |
|---|---|
| Form 8288 | Reports and remits FIRPTA withholding to the IRS |
| Form 8288 A | Reports the withholding attributable to each foreign seller |
| Form 8288 B | Requests an IRS withholding certificate to reduce or eliminate withholding when applicable |
| Form W 7 | Used to apply for an individual taxpayer identification number when required and the applicant qualifies |
Forms 8288 and 8288 A generally must be filed by the 20th day after the date of disposition, subject to special timing when a withholding certificate application is pending.
Does a Foreign Seller Need an ITIN?
A foreign individual seller who is not eligible for a Social Security number may need an individual taxpayer identification number to satisfy federal filing requirements, apply for a withholding certificate, and claim credit for FIRPTA withholding.
The IRS specifically permits a foreign seller with a legally binding contract to sell a United States real property interest to apply for an ITIN under the FIRPTA procedures when the requirements are satisfied.
A seller who needs both an ITIN and a withholding certificate can generally submit Form W 7 with Form 8288 B and the required supporting documents under the applicable IRS procedure.
Do Not Leave the Taxpayer Identification Number Until Closing
The taxpayer identification number affects Form 8288 B processing and the seller's ability to obtain the IRS stamped withholding documentation needed to claim the federal tax credit.
How Does a Foreign Seller Claim FIRPTA Withholding Back?
FIRPTA withholding is generally claimed as a credit on the foreign seller's United States income tax return.
The buyer submits Form 8288 and Forms 8288 A to the IRS. The IRS generally stamps Copy B of Form 8288 A and sends it to the foreign seller when the required taxpayer identification information is available.
A nonresident alien individual generally reports the property disposition on Form 1040 NR and claims the FIRPTA withholding as a payment. A foreign corporation can have a Form 1120 F filing requirement. The appropriate return depends on the identity and tax classification of the seller.
The actual federal tax is calculated on the return. If the FIRPTA withholding exceeds the seller's final tax liability, the excess can generally produce a refund, subject to the normal return processing rules.
Does California Also Withhold When a Foreign Person Sells California Real Estate?
Yes, unless a California withholding exemption or alternative rule applies.
California's real estate withholding system is separate from federal FIRPTA. California generally requires withholding when California real property is sold or transferred under Revenue and Taxation Code Section 18662.
California Form 593 Withholding Is Not Limited to Nonresident Sellers
California's real estate withholding rules apply more broadly than FIRPTA. The California rule is generally triggered by the sale or transfer of California real property rather than solely by whether the seller is a nonresident or foreign person.
A California resident can therefore be subject to Form 593 withholding if no exemption or alternative rule applies.
How Much Is California Real Estate Withholding?
California Form 593 generally provides two calculation methods when withholding is required:
Sales Price Method
The standard sales price method generally equals:
3 1/3 percent of the sales price
Alternative Withholding Calculation
Instead of the sales price method, the seller can elect an alternative withholding calculation based on:
Estimated California gain multiplied by the applicable maximum tax rate
The 2026 Form 593 lists the following rates for the alternative calculation:
| Seller Type | 2026 Form 593 Rate |
|---|---|
| Individual | 12.3 percent |
| Non California partnership | 12.3 percent |
| Corporation | 8.84 percent |
| Bank and financial corporation | 10.84 percent |
| S corporation | 13.8 percent |
| Financial S corporation | 15.8 percent |
| Trust | 12.3 percent |
Example: California Sales Price Method Versus Gain Method
Assume a foreign individual sells California real estate for $1,200,000.
The standard California sales price withholding method would generally produce withholding of $39,960.
Assume the Form 593 estimated California gain calculation is $180,000.
Using the 2026 individual alternative withholding rate of 12.3 percent, the alternative withholding calculation would be $22,140.
In this example, properly completing the gain based election before closing reduces California withholding by $17,820.
The calculation affects withholding only. The seller's actual California income tax is still determined on the California income tax return.
What Goes Into the California Estimated Gain Calculation?
Form 593 Part VI calculates estimated gain using the property's California tax basis and other applicable adjustments.
The calculation can require:
- Selling price
- Selling expenses
- Original purchase price
- Depreciation
- Other decreases to basis
- Capital additions and improvements
- Other increases to basis
- Suspended passive activity losses directly related to the property sold
California basis can differ from federal basis, particularly when federal and California depreciation deductions differed during the ownership period.
For a long held rental property, the withholding calculation should therefore use the actual California depreciation and basis history rather than assuming that the original purchase price is still the seller's tax basis.
When Is California Real Estate Withholding Not Required?
California provides several full or partial withholding exemptions and special rules.
Examples under the current Form 593 rules include:
- Sales for $100,000 or less
- Certain qualifying principal residence transactions
- Property last used as the seller's principal residence under the Form 593 rule
- A California tax loss or zero gain properly calculated on Form 593
- Certain involuntary conversions under Section 1033
- Certain transfers qualifying under Section 351 or Section 721
- Certain California corporations and partnerships meeting the Form 593 requirements
- Certain tax exempt sellers
- Certain retirement plans, insurance companies, and charitable remainder trusts
- Qualifying Section 1031 exchanges, subject to the specific exchange and boot rules
An Exemption From Withholding Is Not Necessarily an Exemption From Tax
Qualifying for a Form 593 withholding exemption does not by itself eliminate the seller's obligation to report the transaction or pay California income tax.
Can Federal FIRPTA and California Form 593 Apply to the Same Sale?
Yes.
A foreign seller of California real estate can be subject to both withholding systems at the same closing.
| Issue | Federal FIRPTA | California Form 593 |
|---|---|---|
| Primary authority | Internal Revenue Code Section 1445 | California Revenue and Taxation Code Section 18662 |
| General trigger | Foreign person disposes of a United States real property interest | Sale or transfer of California real property unless an exception applies |
| Standard calculation | Generally 15 percent of amount realized | Generally 3 1/3 percent of sales price |
| Possible reduction | IRS withholding certificate and other statutory exceptions | Alternative withholding calculation and Form 593 exemptions |
| Main forms | Forms 8288, 8288 A, and potentially 8288 B | Form 593 and Form 593 V |
| Final income tax? | No | No |
| Credit claimed | Federal income tax return | California income tax return |
Example: Two Withholding Systems at One Closing
Return to the example of a foreign individual selling California property for $1,200,000 with an estimated gain of $180,000.
Assuming no federal exception or withholding certificate applies, standard FIRPTA withholding could be $180,000.
California sales price withholding could separately be $39,960, or the properly elected alternative gain based calculation in this example could be $22,140.
The seller can therefore face a substantial reduction in closing proceeds even though both amounts are tax prepayments rather than final tax liabilities.
How Does California Form 593 Work With a Section 1031 Exchange?
California Form 593 provides special withholding treatment for qualifying simultaneous and deferred Section 1031 exchanges.
A qualifying simultaneous exchange can generally be exempt from California real estate withholding.
A qualifying deferred exchange can generally be exempt from withholding at the initial transfer. However, if the seller receives money or other property in addition to qualifying replacement property and that amount exceeds $1,500, California withholding can apply to the boot under the Form 593 rules.
If the deferred exchange fails or does not qualify for nonrecognition treatment, the qualified intermediary or accommodator can become responsible for California withholding. Under current FTB guidance, the standard failed exchange calculation is generally 3 1/3 percent of the sales price unless the alternative withholding calculation is properly elected.
For California deferred gain reporting after an outbound exchange, see California 1031 Exchanges and Deferred Gain: Tax Rules for Nonresidents .
Does FIRPTA Also Apply to a Section 1031 Exchange?
Section 1031 and FIRPTA must be analyzed separately.
A foreign seller cannot assume that entering into a Section 1031 exchange automatically eliminates federal FIRPTA withholding.
In a fully qualifying simultaneous exchange with no taxable boot, the FIRPTA regulations can permit a notice of nonrecognition when all requirements are satisfied.
A deferred Section 1031 exchange presents a different problem because the buyer generally cannot know at the time of the original transfer that the foreign seller will ultimately satisfy every requirement for nonrecognition.
IRS guidance therefore provides that a foreign seller in a deferred exchange may need a withholding certificate rather than relying on a notice of nonrecognition to eliminate or reduce FIRPTA withholding.
A Section 1031 Exchange Can Have Different Federal and California Withholding Procedures
California may exempt the initial transfer of a qualifying deferred exchange from Form 593 withholding while the federal FIRPTA rules still require a separate withholding certificate analysis.
The federal and California withholding rules should therefore be reviewed independently before the exchange begins.
How Does California Withholding Work on an Installment Sale?
California has specific real estate withholding procedures when at least one payment will be received after the taxable year of sale.
Under the standard method:
- Withholding during escrow is generally 3 1/3 percent of the down payment
- The buyer generally withholds on the principal portion of later installment payments
- The interest portion of an installment payment is not subject to California real estate withholding
- The buyer generally continues filing Form 593 and remitting withholding as principal payments are made
The alternative gain based withholding calculation can also be used for an installment sale when properly elected.
The buyer can therefore have California withholding responsibilities for years after escrow closes.
Does Seller Financing Reduce Federal FIRPTA Withholding?
Not automatically.
FIRPTA generally measures withholding using the amount realized, which can include amounts to be paid in the future. Merely accepting a promissory note does not automatically convert the federal withholding obligation into the California style payment by payment system.
Form 8288 B specifically includes a category for certain installment sale withholding certificate requests. A foreign seller considering seller financing should therefore evaluate the federal withholding consequences before agreeing to the payment structure.
Seller Financing Can Create a Closing Cash Problem
If federal withholding is calculated on an amount realized that includes future payments, the required FIRPTA withholding can be large compared with the cash the seller actually receives at closing.
This is another reason to address the withholding certificate analysis before the installment sale documents are finalized.
How Does Depreciation Affect a Foreign Seller's Tax?
Withholding and taxable gain are separate calculations.
Rental and business real estate depreciation reduces adjusted tax basis. When the property is sold, the lower adjusted basis can increase recognized gain and can also affect the character of that gain.
Depending on the assets involved, the sale can include:
- Section 1245 ordinary income recapture
- Section 1250 ordinary income recapture when applicable
- Unrecaptured Section 1250 gain when applicable to the seller
- Section 1231 gain or loss
- Gain attributable to land
Cost segregation can make the analysis more complex because the property can include multiple tax assets with different depreciation and disposition rules.
For more information, see Depreciation Recapture on Rental Property .
How Does a Foreign Seller Claim California Form 593 Withholding?
California real estate withholding is claimed as a credit on the appropriate California income tax return.
FTB states that once the real estate transaction has closed, an amount already withheld generally is recovered by claiming the withholding credit on the appropriate tax return rather than asking escrow to reverse the withholding.
Depending on the seller, the applicable California return can include Form 540NR, Form 541, Form 100, Form 100S, Form 565, or Form 568.
The seller should retain Form 593 because it documents the California withholding credit.
What if the Seller Is a Foreign Corporation, Partnership, Trust, or Estate?
FIRPTA is not limited to nonresident alien individuals.
A foreign corporation, foreign partnership, foreign trust, or foreign estate can also be a foreign person for purposes of Section 1445.
The final federal return, tax rates, withholding certificate computation, and related filing requirements can differ depending on the seller's classification.
Ownership through an entity should therefore be identified before the withholding calculation is prepared rather than assuming that the name shown on the deed establishes the federal tax owner.
Determine the Tax Owner Before Calculating Withholding
This is especially important for single member limited liability companies and other disregarded entities. For federal FIRPTA purposes, the owner of a disregarded entity is generally treated as the transferor.
What Should a Foreign Seller Review Before Closing?
A preclosing withholding and gain analysis should generally address:
- Whether the seller is a foreign person for FIRPTA purposes
- The tax owner of the property
- The seller's United States taxpayer identification number
- The FIRPTA amount realized
- Whether the residence exception or reduced rate applies
- The seller's adjusted federal tax basis
- The seller's adjusted California tax basis
- Acquisition closing costs
- Capital improvements
- Depreciation allowed or allowable
- Cost segregation studies
- Prior Section 1031 exchanges
- Estimated federal taxable gain
- Potential depreciation recapture
- Whether Form 8288 B should be filed
- The timing of the IRS withholding certificate request
- California Form 593 exemptions
- California sales price versus alternative gain based withholding
- Suspended passive losses related to the property
- Section 1031 exchange treatment
- Installment sale withholding if seller financing is planned
- The seller's federal and California return filing requirements
Withholding Planning Is Most Valuable Before Escrow Closes
Once withholding has already been remitted, the seller may need to wait until the applicable federal or California return is processed to recover an overpayment.
Before closing, the seller can still evaluate a federal withholding certificate, California gain based withholding, available exemptions, transaction structure, and documentation of basis.
Frequently Asked Questions About FIRPTA and California Real Estate Withholding
What is FIRPTA withholding?
FIRPTA withholding is the federal withholding system under Internal Revenue Code Section 1445 that generally applies when a foreign person disposes of a United States real property interest. The buyer is generally responsible for withholding and reporting the applicable amount.
How much is FIRPTA withholding on a real estate sale?
The general rate is 15 percent of the amount realized. Special residence rules can reduce the rate to 10 percent or eliminate withholding for qualifying transactions, and an IRS withholding certificate can reduce or eliminate withholding in other qualifying situations.
Is FIRPTA 15 percent of the gain or the sales price?
FIRPTA is generally 15 percent of the amount realized, not 15 percent of taxable gain. In a simple cash sale the amount realized can resemble the sales price, but the statutory calculation can also include other property and liabilities.
When is FIRPTA withholding reduced to 10 percent?
The reduced 10 percent rate generally applies when the buyer acquires the property for use as a residence and the amount realized is more than $300,000 but not more than $1 million.
When does the $300,000 FIRPTA residence exception apply?
Withholding generally is not required when one or more individual buyers acquire the property for use as a residence, the amount realized is $300,000 or less, and the applicable occupancy requirements are satisfied.
Can FIRPTA withholding be reduced before closing?
Yes. Form 8288 B can be used in qualifying circumstances to request an IRS withholding certificate. This is particularly useful when the normal withholding substantially exceeds the seller's maximum expected federal income tax liability.
What is Form 8288 B?
Form 8288 B is the IRS application used for certain requests to reduce or eliminate FIRPTA withholding. The application can be based on the seller's maximum tax liability, nonrecognition treatment, certain installment sale rules, or other qualifying circumstances.
Who is responsible for FIRPTA withholding?
The buyer is generally the withholding agent. An escrow or settlement company can perform the withholding mechanics, but the buyer can remain legally responsible for satisfying the federal withholding requirements.
Is FIRPTA withholding the foreign seller's final federal tax?
No. FIRPTA withholding is generally a tax prepayment. The seller reports the actual transaction on the appropriate United States income tax return, calculates the final tax, and claims credit for the FIRPTA withholding.
How does a foreign seller claim FIRPTA withholding back?
The foreign seller generally claims the withholding as a payment on the applicable United States income tax return. Form 8288 A or other required evidence of withholding supports the credit. If withholding exceeds the final federal tax liability, the excess can generally be refunded through the return filing process.
Does California also withhold when a foreign person sells property?
Yes, if the property is California real estate and no California withholding exemption or special rule applies. California Form 593 withholding is separate from federal FIRPTA withholding.
Is California Form 593 withholding only for nonresidents?
No. California generally requires real estate withholding when California real property is sold or transferred unless an applicable exemption or alternative rule applies. The rule is not limited to foreign or nonresident sellers.
What is the California 3 1/3 percent withholding rule?
When withholding is required, the standard California sales price method generally equals 3 1/3 percent of the sales price. Form 593 also permits an alternative gain based calculation.
Can California withholding be based on actual gain instead of the sales price?
Yes. The Form 593 alternative withholding calculation uses estimated gain multiplied by the applicable maximum tax rate for the seller's filing type. A properly supported gain calculation can result in substantially less withholding when the property has a high adjusted basis.
Does Form 593 withholding apply to a Section 1031 exchange?
California provides special withholding treatment for qualifying Section 1031 exchanges. A qualifying deferred exchange can generally be exempt from withholding at the initial transfer, while boot and a later failed exchange can create withholding obligations.
What happens if a Section 1031 exchange fails?
Under the California rules, a qualified intermediary or accommodator can become responsible for withholding if the deferred exchange does not occur or does not qualify for nonrecognition. The standard failed exchange calculation is generally based on 3 1/3 percent of sales price unless the alternative withholding calculation is properly used.
How does California withholding work for an installment sale?
California generally withholds on the down payment during escrow and on the principal portion of later installment payments. Interest is excluded from the real estate withholding calculation. The buyer generally has continuing Form 593 withholding and reporting responsibilities after closing.
Can both FIRPTA and California withholding apply at the same closing?
Yes. A foreign seller of California real estate can be subject to federal FIRPTA withholding and California Form 593 withholding in the same transaction. Each withholding amount is separately reported and later claimed as a credit on the applicable federal or California income tax return.
What records should a foreign seller provide before closing?
Important records generally include the original acquisition documents, improvements, depreciation schedules, cost segregation studies, prior Section 1031 exchange records, expected selling expenses, taxpayer identification information, and documents supporting federal and California adjusted basis. These records are needed to calculate actual gain and evaluate reduced withholding.
Final Takeaway
Foreign ownership of United States real estate can create substantial withholding at the time of sale. For California property, federal FIRPTA and California Form 593 can apply simultaneously.
The default withholding amounts can be significantly larger than the seller's eventual income tax liability because federal FIRPTA generally uses the amount realized and California's standard method generally uses the sales price.
Those default amounts are not always unavoidable. Depending on the facts, a federal Form 8288 B withholding certificate, a California Form 593 alternative gain calculation, a statutory exemption, or special Section 1031 or installment sale rules can materially change the amount withheld.
The greatest planning opportunity generally exists before the sale closes. The seller's tax basis, depreciation history, taxpayer identification number, entity structure, expected gain, and withholding alternatives should be reviewed while the transaction is still in escrow.
Review FIRPTA and California Withholding Before Closing
I assist foreign owners of United States and California real estate with preclosing withholding and property sale analysis. The review can include FIRPTA status, federal adjusted basis, estimated gain, Form 8288 B withholding certificate analysis, California Form 593, sales price versus gain based California withholding, depreciation recapture, prior Section 1031 exchanges, installment sales, taxpayer identification requirements, and federal and California return filing obligations.
The objective is to determine the expected federal and California tax result before escrow closes and identify available withholding reductions while there is still time to implement them.
Schedule a ConsultationThis article provides general federal and California income tax information. FIRPTA and California real estate withholding depend on the seller's tax status, property ownership, amount realized, adjusted basis, depreciation, buyer use, entity classification, taxpayer identification information, transaction structure, and other facts.
