Selling US real property as a foreign person triggers a withholding obligation that falls on the buyer. That placement of responsibility is what makes it a transaction issue rather than a later tax matter.
Why the buyer is made responsible
A tax authority collecting from a non-resident faces an enforcement problem: once the sale completes, the seller and the proceeds may leave the jurisdiction.
Placing the duty on the buyer, who is present and holds the funds at closing, solves the collection problem at the point where the money is available.
The buyer becomes liable for the amount that should have been withheld if it is not, which is why closing agents treat the question carefully.
What withholding is and is not
The withheld amount is a prepayment against the seller's eventual tax liability, calculated as a percentage of the gross sale price rather than of the gain.
Because it applies to the price and not the profit, it can exceed the actual tax owed, particularly where the property is sold at a small gain or a loss.
The seller recovers any excess by filing a return for the year, which means the difference is tied up until that filing is processed.
How reductions and exemptions work
Provisions exist to reduce or eliminate withholding in defined circumstances, including certain lower-value sales where the buyer will use the property as a residence.
A seller expecting the withheld amount to exceed the liability may apply for a withholding certificate authorizing a reduced amount, before or around closing.
Applications take time to process, and closings are sometimes structured to hold funds in escrow pending the determination.
Why seller status is the first question
The obligation depends on whether the seller is a foreign person for tax purposes, which is a defined status rather than a matter of citizenship alone.
Buyers usually obtain a certification of non-foreign status from the seller, which relieves them of the obligation if properly obtained and retained.
Where the seller is an entity, determining status involves looking at how the entity is classified and treated, which is more involved than for an individual.
How it interacts with state rules
Several states operate their own withholding on real property sales by non-residents, including non-residents of that state who live elsewhere in the country.
Rates, thresholds and exemption procedures differ, and a transaction can be subject to both federal and state withholding simultaneously.
These rules change and turn on individual facts, so the applicable authorities and a qualified tax professional are where the treatment of any particular sale has to be established.