Sold U.S. Property and Lost 15% at Closing? What Happens Next and How to Get It Back

Introduction

For many foreign sellers, the most jarring moment in a U.S. real estate transaction comes at closing, not when documents are signed, but when they see the settlement statement. A significant portion of the sale price has been withheld and sent to the IRS under FIRPTA. The amount often feels disproportionate to the actual profit on the sale, and sellers are left asking a simple question: Is this money gone for good?

In most cases, it is not. However, recovering FIRPTA withholding is not automatic, and misunderstanding what happens next can lead to unnecessary frustration or missed refunds.

What Actually Happened at Closing

When FIRPTA applies, U.S. law places the obligation to withhold on the buyer, not the seller. The buyer is required to withhold a percentage of the gross sales price and remit it to the IRS shortly after the transaction closes.

This withholding occurs without regard to whether the seller made a profit, broke even, or sold at a loss. At closing, no one calculates the seller’s actual U.S. tax liability. The IRS receives the funds first, and the reconciliation comes later.

From the seller’s perspective, this often feels punitive. In reality, it reflects the IRS’s approach to cross-border transactions. Collect first, reconcile through filing.

Why the Withholding Often Feels Excessive

The core issue is that FIRPTA withholding is based on gross proceeds, not net gain. That distinction explains much of the frustration sellers experience.

Many sellers assume tax is calculated only on profit. Under FIRPTA, the withholding ignores factors that normally reduce taxable income, such as the original purchase price, capital improvements, selling expenses, or even the presence of a loss.

As a result, it is common for the amount withheld at closing to exceed the tax ultimately owed once the transaction is properly reported.

What Happens After the Funds Are Sent to the IRS

Once the buyer remits the withheld amount, the IRS does not automatically review the transaction or issue a refund. The responsibility shifts to the seller to reconcile the withholding through the U.S. tax system.

This typically involves filing a U.S. income tax return for the year of sale, reporting the transaction, and claiming the withholding as a credit against the actual tax liability. If the withholding exceeds the tax owed, the excess is refunded after processing.

Until that return is filed, the IRS has no mechanism to determine whether too much tax was collected.

Common Mistakes That Delay Recovery

Foreign sellers often encounter delays because of avoidable misunderstandings. Some assume that selling at a loss eliminates the need to file a return. Others believe the withholding will be refunded automatically. In practice, neither is true.

Additional issues include missing documentation for property basis, failure to obtain a required taxpayer identification number, or incorrect reporting of ownership or entity status. These errors can slow processing or trigger follow-up requests from the IRS.

Conclusion

Seeing a large portion of sale proceeds withheld at closing can be unsettling, but FIRPTA withholding is only the starting point of the tax process, not the final result. Recovering excess withholding depends on proper reporting, accurate calculations, and timely compliance with U.S. tax filing requirements.

Foreign sellers dealing with FIRPTA often work with professionals who focus specifically on FIRPTA reconciliation and nonresident tax reporting. Experience with these transactions can make a meaningful difference in avoiding delays and ensuring the process is handled correctly.

This article is for educational purposes only and does not constitute tax or legal advice.