U.S. property tax FAQs

FIRPTA withholding is calculated on the gross sales price, not the profit.

The seller’s gain or loss is irrelevant for withholding purposes – a foreign seller could sell at a loss and still trigger withholding.

Under FIRPTA, the buyer (or their agent) is generally required to withhold 15% of the gross sale price when purchasing property from a foreign individual.

However, the seller can potentially reduce the tax owed through a FIRPTA withholding certificate (Form 8288-B).

The certificate, issued by the IRS, can even eliminate the withholding and replace it with an amount based on the seller’s actual expected tax liability rather than the gross proceeds.

Yes there are several FIRPTA exemptions.

For example, withholding does not apply when:

• The sales price is $300,000 or less and the buyer intends to use the property as a residence
• The seller provides a non-foreign person affidavit (certifying they are a U.S. person)
• The IRS issues a withholding certificate reducing or eliminating the withholding amount
• The property is acquired by the U.S. government
• The disposition is of publicly traded stock in a USRPHC (U.S. real property holding corporation) where the seller holds 5% or less

Form 8288-B is required only for the withholding-certificate route (where the seller asks the IRS to reduce or eliminate withholding based on actual expected tax liability). The other exemptions above operate differently and do not require Form 8288-B – for example, the $300,000 residence exemption and the publicly traded stock exception apply by their terms, and the non-foreign person exemption is established by the seller’s signed affidavit.

Yes – this can be done by applying to the IRS using a FIRPTA exemption form (a withholding certificate – Form 8288-B) before closing the sale.

If the actual tax liability is less than the standard withholding amount, the IRS can issue a certificate reducing or eliminating the withholding.

It’s important to note that the application must be submitted before or on the date of closing.

The buyer must still withhold the full amount while the application is pending, but once a certificate is issued, the excess is returned to the seller.

The answer to this question depends largely on the purchase price.

The reduced rates of FIRPTA and the circumstances in which they apply are illustrated in the table below.

Form 8288: filed by the buyer (the withholding agent) to report and remit the withheld amount to the IRS. It is due within 20 days of the sale closing.

Form 8288-A: this is a withholding statement which is attached to Form 8288. The IRS stamps a copy of this form and returns it to the foreign seller. It is then used to claim credit for the withheld amount on the nonresident’s tax return.

Form 8288-B: this document is filed by the seller (or buyer) to apply for a FIRPTA withholding certificate in order to reduce or eliminate withholding before closing.

Form 1040-NR: a tax return filed by the foreign seller to report the actual gain and claim credit for the amount withheld.

Generally, no.

The IRS has taken the position that most U.S. tax treaties do not override FIRPTA withholding obligations.

The reason is structural: the gains (or immovable property) article of U.S. treaties preserves the United States’ right to tax gains from U.S. real property, and FIRPTA itself overrode any earlier treaty exemptions for such gains.

However, a foreign seller may still use a treaty position to reduce their ultimate tax liability. But the withholding itself at the point of sale typically still applies.

The correct route to reduce withholding based on treaty benefits is to apply for a withholding certificate (Form 8288-B) before completion of a sale.

FIRPTA applies only to the sale of U.S. real property interests (sales, exchanges and certain other transfers). It does not apply to rental income.

Rental income earned by a nonresident is taxed under a separate framework.

It is generally treated as FDAP income (Fixed, Determinable, Annual, or Periodical) subject to 30% gross withholding by the payer, unless the nonresident elects to treat the rental income as effectively connected income (ECI), in which case it is reported on Form 1040-NR at graduated rates, with deductions for expenses allowed.

Yes.

The U.S. taxes rental income based on where the property is located, not where the owner lives.

If you own U.S. property and earn rental income from it, that income is subject to U.S. tax regardless of your country of residence or tax status.

By default, U.S. rental income paid to a nonresident alien is treated as FDAP income.

What is FDAP income?

In short, it stands for income that is considered Fixed, Determinable, Annual or Periodical. Rental income earned by international investors is subject to an FDAP withholding of 30% on gross rental receipts (meaning no deductions are allowed).

For rental income from U.S. real property, most U.S. treaties do not reduce this 30% rate, because the treaty article covering income from real property preserves full U.S. taxation. The 30% gross rate therefore applies unless the owner makes an ECI election. (Treaty rate reductions are generally available for other income types, such as dividends, interest and royalties, rather than for real property rents.)

These are two different tax regimes.

What is FDAP income?

Under FDAP (Fixed, Determinable, Annual or Periodical), the property manager withholds 30% of gross rents and remits it to the IRS on your behalf. You pay tax on every dollar collected before any expenses.

What is ECI income?

Under ECI (effectively connected income), rental income is treated as if it were connected to a U.S. trade or business. You file a 1040-NR, deduct allowable expenses (mortgage interest, depreciation, repairs, management fees, etc.), and pay tax only on the net profit at graduated rates. For most rental property owners with meaningful expenses, ECI treatment results in a significantly lower tax bill.

For most nonresident landlords with real expenses the ECI election is the most favorable tax treatment.

The FDAP default 30% gross withholding can result in a substantial tax bill even when the property is running at a loss.

Meanwhile, under ECI, you pay tax on net income at graduated rates. In a loss year, you may owe nothing.

Form W-8ECI (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States) is the form you provide to your property manager to certify that your rental income is ECI.

Once you provide it, the property manager is no longer required to withhold the default 30% on gross rents.

You should provide it before rental payments are made, ideally when you first engage the property manager.

It is valid for three years unless your circumstances change.

If you do not provide this form, the property manager is legally obligated to withhold 30% and remit it to the IRS.

If you have made the ECI election (or intend to), you must file IRS Form 1040-NR (U.S. Nonresident Alien Income Tax Return).

You should also attach Schedule E to report rental income and expenses.

The deadline for filing Form 1040-NR is generally 15 June for nonresidents who do not have wages subject to U.S. withholding.

If you are under the default FDAP regime and tax is fully withheld at source, a 1040-NR may not be strictly required but filing is often advisable to claim a refund if the amount withheld exceeds your actual liability.

Under ECI treatment, nonresident landlords can deduct the same rental expenses as U.S. resident landlords, including:

• Mortgage interest
• Property taxes
• Depreciation (residential rental property is depreciated over 27.5 years)
• Property management fees
• Repairs and maintenance
• Insurance premiums
• Utilities paid by the owner
• Advertising and leasing costs
• Professional fees (accountant, attorney fees related to the property)
• Travel expenses to manage the property (subject to limitations)

The default income tax on rental property is 30% of the gross amount paid to a nonresident alien owner.

This applies to the full rental amount collected before any deductions for expenses, mortgage payments or management fees.

There are two situations where you are not required to withhold at 30%:

• The owner provides you with a valid Form W-8ECI, certifying that their rental income is effectively connected income (ECI). In this case, withholding is not required by the property manager. Instead, the owner takes responsibility for reporting and paying tax via Form 1040-NR

• A valid U.S. tax treaty reduces the applicable rate and the owner provides appropriate documentation supporting the reduced rate. In practice this rarely applies to ordinary rental income from real property – U.S. treaties generally do not provide a reduced rate on real property rents, so for most nonresident landlords the only route below 30% is the W-8ECI / ECI election above. It is advisable to not apply a reduced treaty rate to rent without confirming the relevant treaty actually covers it, or you risk under-withholding and personal liability

Note: If you have not received valid documentation from the owner, you must withhold at 30%.

You should collect the following before making any rental payments:

• Form W-8BEN (for individual owners) or Form W-8BEN-E (for foreign entities): These documents establish the owner’s foreign status and, where applicable, claim a reduced treaty withholding rate. They are valid for three calendar years from the date of signing

• Form W-8ECI: This is provided instead of W-8BEN if the owner has elected to treat rental income as ECI. This removes your withholding obligation but requires the owner to file a U.S. tax return

• Individual Taxpayer Identification Number (ITIN): Nonresident owners must have a U.S. ITIN in order to file a tax return and to be properly identified on IRS forms. If the owner does not yet have one, they should apply using Form W-7

You should also confirm the owner’s country of residence and whether a tax treaty applies, as this affects withholding rates.

Your primary filing obligations are:

• Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons): This is an annual return summarizing all withheld amounts paid to foreign owners during the calendar year. It is due on 15 March of the following year

• Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding): This is issued to each nonresident owner and filed with the IRS, reporting the gross income paid and tax withheld for the year. This is also due 15 March. You must provide a copy to the owner so they can use it to file their 1040-NR and claim credit for withheld tax

• Form 8288 (U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons): Filed when a nonresident investor sells a U.S. property. As the withholding agent, you may be responsible for withholding 15% of the gross sale price under FIRPTA and remitting it to the IRS using this form. Form 8288 is filed together with Form 8288-A (a withholding statement for each seller) and must be submitted within 20 days of closing

Withheld tax must be deposited electronically via EFTPS (Electronic Federal Tax Payment System).

The deposit frequency depends on your total withholding liability:

Quarter-month periods end on the 7th, 15th, 22nd and last day of each month.

If your withheld amounts regularly exceed $2,000 per period, you will effectively be making deposits multiple times per month.

Penalties apply for late or missing deposits, so EFTPS enrollment should be in place before you begin managing property for foreign owners.

As the withholding agent, you are personally liable to the IRS for any tax that should have been withheld but was not.

The IRS can pursue you directly without first attempting to collect from the owner.

Specific consequences can include:

• Failure to withhold: You become liable for the full amount that should have been withheld, plus interest from the date it was due

• Failure to deposit: Penalties of 2% to 15% of the underpaid amount depending on how late the deposit is

• Failure to file Form 1042 or 1042-S: each late or missing Form 1042-S (an information return) carries a penalty of up to $340 per form for 2025 returns – the amount is indexed annually and is higher for intentional disregard. Late or non-filing of the Form 1042 itself (the annual return) is penalized separately under a different rule – 5% of the unpaid tax for each month or part of a month it is late, up to 25%

• Willful failure: In cases of deliberate non-compliance, criminal penalties can apply

Yes.

Sprintax Property is built for property management companies with international investor clients. The platform lets you view and manage the tax profiles of each of your nonresident clients through a single, user-friendly dashboard – covering withholding, IRS reporting and compliance in one place.

If you have at least one nonresident investor in your portfolio, Sprintax Property can help you manage your withholding obligations, reduce compliance risk and ensure both your organization and your clients remain fully tax compliant.

Contact our team to book a demo. We’ll walk you through how Sprintax Property works and how it can support your portfolio.