Out-of-State vs Foreign: Two Different Withholding Rules That Often Hit the Same Seller
"Nonresident real estate withholding" actually describes two separate rules that happen to share a word. State nonresident withholding applies when a US person sells property in a state they don't live in. FIRPTA is a federal rule that applies only when a foreign (non-US) person sells US property. They have different rates, different forms, and different triggers — and a single sale can fire one, the other, or both at once.
The confusion is understandable. Both rules grab a slice of your sale proceeds at closing as a prepayment of tax. Both call the seller a "nonresident." But "nonresident" means different things to each: a state cares about residency in that state; FIRPTA cares about whether you're a US person at all. Getting them mixed up is how sellers either over-withhold (locking up cash for a year) or under-withhold (and leave the buyer holding personal liability). This guide untangles the two, shows exactly which one hits which seller, and walks through worked examples on the same California rental sold by two different owners.
The two rules, side by side
Think of it as a two-layer filter that every sale runs through:
- Layer 1 — FIRPTA (federal): Is the seller a foreign person (non-US citizen and non-resident-alien for tax purposes, or a foreign entity)? If yes, the Foreign Investment in Real Property Tax Act requires the buyer to withhold and remit a percentage to the IRS. This layer is binary — it's either on or off, and it has nothing to do with which state the seller lives in. See the IRS FIRPTA Withholding page.
- Layer 2 — State nonresident withholding: Is the seller a nonresident of the state where the property sits? Most states with an income tax require the closing agent (or buyer) to withhold a percentage and remit it to the state tax authority. A US citizen in another state triggers this. So does a foreign person — foreignness does not exempt you from the state layer.
Because the layers test different things, the four combinations all exist:
| Seller type | FIRPTA (federal)? | State nonresident withholding? |
|---|---|---|
| Resident of the same state, US person | No | No |
| US person living in another US state | No | Yes |
| Foreign person living abroad | Yes | Yes (in most income-tax states) |
| US citizen living abroad | No | Yes (treated as a state nonresident) |
That last row is the one that surprises people, and we'll come back to it — a US passport switches FIRPTA off permanently, but it does nothing for the state layer.
FIRPTA: the federal layer (foreign sellers only)
FIRPTA exists because the IRS can't easily chase a seller who lives in another country for the capital-gains tax owed on US property. So it shifts the collection point to closing and makes the buyer the withholding agent. Per the IRS:
- Standard rate: 15% of the amount realized (generally the gross sale price), not 15% of the profit.
- Reduced rate: 10% when the buyer is acquiring the property as a residence and the amount realized is between $300,000 and $1,000,000.
- Exempt: when the buyer is acquiring it as a residence and the amount realized is $300,000 or less (the buyer must meet the use-as-residence test).
The reporting runs on Form 8288 (the buyer's withholding return), Form 8288-A (the statement that gives the seller credit for the amount withheld), and Form 8288-B (the application a seller files before closing to request a reduced withholding certificate when the actual tax owed is less than 15% of the price). FIRPTA withholding is not the final tax — it's a deposit. The foreign seller files a US return afterward to reconcile and claim any refund.
State nonresident withholding: the second layer
Most states with an income tax run their own version of FIRPTA aimed at sellers who live outside that state — regardless of citizenship. The mechanics mirror FIRPTA (withhold at closing, remit, reconcile on a return), but rates and thresholds are set state-by-state and are usually lower than 15%. Four representative states:
| State | Default rate | Applied to | Form | Small-sale exemption |
|---|---|---|---|---|
| California | 3⅓% (3.33%) | Sale price | Form 593 | Sale price $100,000 or less |
| Georgia | 3% | Sale price (or gain with affidavit) | Form G-2RP | Purchase price under $20,000 |
| Maryland | 8.75% (individuals) / 8.25% (entities) | Total payment / sale price (or gain via MW506AE) | Form MW506NRS | Principal residence & other statutory exemptions |
| New York | 10.90% | Gain (estimated tax) | Form IT-2663 | Principal-residence exclusion; no NY gain |
Sources: California FTB, Georgia DOR, Maryland Comptroller, and New York DTF (IT-2663 instructions). Note the structural differences: California and Georgia default to a small percentage of the gross price; New York withholds at its top marginal rate but only on the estimated gain; Maryland uses a high rate on the payment but lets you drop to gain-only with an advance application (Form MW506AE, due at least 21 days before closing).
Same property, two sellers. A single-family rental in Sacramento, California sells for $800,000. The buyer is an investor (not buying it as a personal residence). The seller's California-source gain is $250,000. Watch how the withholding changes based on who the seller is.
Seller A — Marcus, a Texas resident (US citizen). Texas has no state income tax, but the property is in California, so Marcus is a California nonresident.
- FIRPTA: Marcus is a US person → FIRPTA does not apply. $0 federal withholding at closing.
- California: Sale price is over $100,000 and Marcus is a nonresident → withhold 3.33% of $800,000 = $26,640 on Form 593, remitted to the FTB.
- Total withheld at closing: $26,640. Marcus reconciles this on a California nonresident return (Form 540NR) and claims any excess as a refund.
Seller B — Priya, a UK resident (non-US person). Same $800,000 sale, same $250,000 gain.
- FIRPTA: Priya is a foreign person and the buyer is not acquiring it as a residence → withhold 15% of the $800,000 amount realized = $120,000, reported on Form 8288 / 8288-A.
- California: Foreignness does not exempt the state layer → still withhold 3.33% of $800,000 = $26,640 on Form 593.
- Total withheld at closing: $146,640 — even though her actual combined tax bill is far lower. Priya can file Form 8288-B before closing to request a reduced FIRPTA certificate based on her real tax liability, which often cuts the $120,000 down dramatically. Without it, she waits to file US and California returns to recover the excess.
The takeaway from the contrast: the state piece ($26,640) is identical for both sellers. The entire $120,000 difference is the FIRPTA layer — switched on solely by Priya's foreign status.
Why a US citizen living abroad triggers state withholding but never FIRPTA
This is the cleanest illustration of why the two rules don't overlap. FIRPTA's trigger is citizenship/tax status: it applies to a "foreign person," and a US citizen is never a foreign person, no matter where they physically live. A US citizen who has lived in Lisbon for fifteen years selling a Georgia rental is still a US person for FIRPTA — so the buyer withholds $0 federally under FIRPTA.
But that same citizen is almost certainly a nonresident of Georgia for state purposes. Georgia's rule keys on residency in Georgia, not on a US passport. So the buyer still withholds 3% of the sale price on Form G-2RP. The citizen's worldwide address abroad makes them more obviously a state nonresident, not less.
Elena, a US citizen living in Portugal, sells a Georgia rental for $400,000. Purchase price is well over the $20,000 floor.
- FIRPTA: US citizen → not a foreign person → $0. Her overseas address is irrelevant to FIRPTA.
- Georgia: Nonresident of Georgia → withhold 3% of $400,000 = $12,000 on Form G-2RP (she can instead provide a gain affidavit to withhold on gain only, or claim a statutory exemption if one applies).
Same seller, sell a UK property instead, and neither rule applies — FIRPTA and US state withholding only attach to US real property.
How each state defines "nonresident" for withholding
This matters because it decides whether the state layer fires at all — and the states don't use one definition. There are two broad approaches:
Address-on-the-1099-S approach
California's Form 593 system is the classic example: a seller is presumed a nonresident for withholding unless they certify (on the form) that they're a California resident or that the mailing address on the 1099-S is in California and is their principal residence. The closing agent largely relies on what's certified at the table. The practical trigger is: does the seller sign a residency certification that turns off withholding? No valid certification → withhold.
Domicile / facts-and-circumstances approach
Georgia, Maryland, and New York lean on actual residency or domicile, documented by affidavit or by the address and certifications at closing. Maryland, for instance, distinguishes "resident" sellers (who file a certification of Maryland residency) from nonresidents, and a nonresident is broadly anyone not a Maryland resident — including out-of-state US persons, foreign persons, and out-of-state entities. The form (MW506NRS) and the residency certification do the gatekeeping.
The crucial point for cross-border sellers: a seller can be a resident for FIRPTA purposes (a US person) yet a nonresident for state purposes, or vice versa. The two definitions are decided independently, on different forms, by different agencies.
Mapping which form applies to which seller — four states
Putting the layers together, here's the form a closing typically generates for each seller type in our four sample states. FIRPTA's Form 8288 family is federal and identical everywhere; the state column changes.
| Seller type | FIRPTA form | California | Georgia | Maryland | New York |
|---|---|---|---|---|---|
| Same-state US resident | None | None (certify residency) | None (affidavit) | None (residency cert.) | None |
| Out-of-state US person | None | Form 593 | Form G-2RP | Form MW506NRS | Form IT-2663 |
| US citizen living abroad | None | Form 593 | Form G-2RP | Form MW506NRS | Form IT-2663 |
| Foreign person | Form 8288 + 8288-A (8288-B to reduce) | Form 593 | Form G-2RP | Form MW506NRS | Form IT-2663 |
Read the bottom row carefully: a foreign seller in any of these states files both the federal 8288 family and the state form. That's the "two rules, same seller" scenario in full — and the most common place sellers get blindsided by the size of the cash hold at closing.
- "Nonresident real estate withholding" is two rules: FIRPTA (federal, foreign sellers) and state nonresident withholding (out-of-state US sellers). They test different things and can both fire on one sale.
- FIRPTA's standard rate is 15% of the gross amount realized (10% for some buyer-as-residence sales $300k–$1M; exempt for qualifying residences $300k or less), reported on Forms 8288/8288-A, with Form 8288-B to request a reduced certificate before closing.
- State rates are usually much lower and state-specific: California 3.33% of price (Form 593), Georgia 3% (Form G-2RP), Maryland 8.75%/8.25% (Form MW506NRS), New York 10.90% of gain (Form IT-2663).
- Citizenship turns FIRPTA off; it does nothing for the state layer. A US citizen living abroad triggers state withholding but never FIRPTA.
- The federal and state "nonresident" definitions are decided separately — by different agencies, on different forms. Get the residency certification right at closing to avoid over-withholding.
- All of this is withholding (a prepayment), not the final tax. File the relevant US and state returns afterward to reconcile and recover any excess.
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Frequently asked questions
If I'm a foreign seller, do FIRPTA and state withholding stack on top of each other?
Yes. They are separate rules collected by different agencies, so both apply to the same sale. A foreign person selling a California property over $100,000 would face 15% FIRPTA federal withholding plus 3.33% California withholding at closing — potentially over 18% of the gross price held back. You reconcile both on separate federal and state returns afterward, and you can apply for a reduced FIRPTA certificate (Form 8288-B) before closing to lower the federal piece.
I'm a US citizen who has lived overseas for years. Will the title company withhold FIRPTA from my sale?
No. FIRPTA only applies to "foreign persons," and a US citizen is never a foreign person regardless of where they live. You should provide the buyer a certification of non-foreign status to document this. However, if the property is in a state where you're a nonresident, the state's nonresident withholding (e.g., Form 593 in California, G-2RP in Georgia) still applies.
Is the withholding based on my profit or the whole sale price?
It depends on the rule. FIRPTA's 15% is on the gross "amount realized" — generally the full sale price, not the gain. Among states it varies: California (3.33%) and the default Maryland calculation apply to the price/payment, while New York's IT-2663 withholds on the estimated gain, and Georgia lets you withhold on gain if you provide an affidavit. Because price-based withholding can far exceed the real tax owed, advance reduction applications (FIRPTA Form 8288-B, Maryland Form MW506AE) exist to right-size it.
Can I avoid state withholding by claiming I'm a resident?
Only if you genuinely are a resident of that state and certify it correctly on the state form. States generally presume a seller is a nonresident unless the seller signs a valid residency certification (or, in some states, an exemption affidavit). Falsely certifying residency is fraud and exposes you to penalties. If you've moved between states, get the residency facts straight before closing.
Will I get the withheld money back?
Withholding is a prepayment, not a final tax. If the amount withheld exceeds your actual tax liability, you recover the difference by filing the relevant return — a federal Form 1040-NR for FIRPTA (foreign sellers) and the state's nonresident income tax return for the state piece. Refunds can take months, which is exactly why reducing the withholding up front (where eligible) is usually worth the effort.
Do these rules apply if I sell through an LLC or trust?
Yes, but the analysis shifts to the entity. A foreign-owned entity can be subject to FIRPTA, and most states apply nonresident withholding to out-of-state entities (Maryland even has a separate 8.25% entity rate). The "nonresident" test looks at the entity's residency/place of business and, for FIRPTA, whether it's a foreign entity or a disregarded entity owned by a foreign person. Entity sales are where professional advice pays for itself.