FIRPTA Tax Blog
What is the 8288-B Process?
By Michael W. Brooks
Non- US sellers of US real estate are subject to a withholding tax at time of sale (either 15% or 10% of the gross sales price). The withholding tax isn’t really a tax, it’s better thought of as a security deposit to ensure the real tax eventually is paid by the non-US person (so the IRS doesn’t have to trust the foreign seller to mail in a check from their home in Shanghai). In 98 or 99 out of 100 instances , the withholding tax amount of 15% or 10% of the sales price will exceed (and maybe greatly exceed) the actual federal income tax owed by the foreign seller (for a rough estimate of the income tax due- simply multiply the seller’s gain made on the sale x 15%). But note the normal refund process (of the withholding tax minus the real tax) requires the foreign seller to wait until January of the next calendar year to simply file a tax return to obtain the refund, and the refund itself will take a few months to arrive after the filing. So the foreign seller must sometimes wait up to a year and a half after the sale to obtain this sizable refund. The IRS Form 8288-B withholding certificate application (via an experienced tax professional because this work is tricky) offers an alternative to this absurdly long wait.
Example. Italian citizen/resident Carlo bought a vacation home in LA in 2006 for $1,000,000, and in January 2016 sells it for $1,100,000. At closing, the escrow company must now withhold $165,000 (15% of $1,100,000= $165,000), even though Carlo only owes at most $15,000 ($100,000 appreciation x 15% capital gains rate). In the traditional process, the escrow company will send the $165,000 into the IRS at the closing in January 2016, and Carlo will only be able to obtain a refund by filing a tax return in (at the earliest) January 2017, and receive a refund of $150,000 three or four months after the filing (i.e., the refund of $150,000 comes a full 16 or 17 months after the sale and Carlo receives no interest from the IRS on the $150,000 he’s waited 17 months for…yikes!!!). This 17 month wait is a horrible result, one which embitters foreign sellers throughout the US.
But there is another option- the 8288-B. Carlo (via a tax professional experienced specifically in this area such as DIRECTS) can prepare an IRS Form 8288-B withholding certificate application. The 8288-B proves to the IRS that Carlo owes (at most) $15,000 on sale, and that he’s entitled to a $150,000 refund. If prepared properly, in a matter of two to three months after applying, the IRS will send notification that it agrees Carlo could only owe at most $15,000, and specifically permit the escrow company (which has to agree to hold the $165,000 in its trust account and not send it in to the IRS at the closing- a service which many escrow companies are reluctant to provide) to release to Carlo $150,000 of the $165,000 withholding tax (while escrow company sends the remaining $15,000 to the IRS). By utilizing the 8288-B process, Carlos receives his $150,000 refund over a year earlier than he would have otherwise received it.