A foreign investor (non-U.S. person) sells a California rental property for $800,000. The property carries a mortgage balance of $600,000. The escrow officer calculates that the combined federal FIRPTA withholding (15%) and California state withholding (3.33%) total approximately $146,400, which exceeds the seller's net equity of $200,000 after paying off the mortgage. What is the most appropriate course of action?
Correct Answer
A) Advise the seller to apply to the IRS for a withholding certificate (Form 8288-B) to request a reduced withholding amount, and delay closing until the certificate is issued or the parties agree on how to proceed
When the required FIRPTA withholding exceeds the seller's available equity, the seller may apply to the IRS for a withholding certificate using Form 8288-B under IRC §1445(b)(4). This application requests that withholding be reduced to an amount reflecting the seller's actual estimated tax liability rather than the statutory percentage of gross sales price. The escrow officer should advise the seller to consult a tax professional and file the application promptly, as closing will typically need to be delayed until the IRS issues the certificate or the parties agree on an alternative resolution. In this scenario: FIRPTA = $120,000 (15% × $800,000); CA withholding = $26,640 (3.33% × $800,000); combined withholding = $146,640, which exceeds the seller's $200,000 equity when combined with the $600,000 mortgage payoff, leaving insufficient proceeds to cover all obligations.
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