How is the FIRPTA withholding certificate figured when a 1031 exchange has boot?

Boot closes the nonrecognition ground and the notice route

The Form 8288-B instructions list three grounds for a certificate: a claim that the transferor is entitled to nonrecognition treatment or is exempt from tax, a calculation showing the transferor's maximum tax liability is less than the tax otherwise required, and the installment sale rules. A full exchange uses the first, on line 7a. The moment some gain will be recognized, the first ground no longer fits, because section 1031(b) recognizes gain up to the money and other property received.

The regulations are consistent about this. Reg. section 1.1445-2(d)(2)(ii)(A) says a buyer may not rely on a seller's nonrecognition notice when the seller qualifies for nonrecognition on part but not all of the gain, and paragraph (d)(2)(iv) bars the notice for simultaneous exchanges that do not qualify in their entirety and for every deferred exchange. Reg. section 1.1445-3(b)(6) then lets a certificate be requested for a like-kind exchange, with information substantiating the section 1031 requirements.

So an exchanger who knows boot is coming applies on line 7b. What counts as boot, and how debt relief and cash net against each other, is on what boot is in a 1031 exchange.

Maximum tax liability has two parts: tax on the disposition and any unsatisfied withholding

Reg. section 1.1445-3(c)(1) defines the transferor's maximum tax liability as the sum of the maximum tax the transferor could be required to pay on the disposition and the transferor's unsatisfied withholding liability. Paragraph (c)(2) gives the starting formula for an individual: the contract price minus the adjusted basis, multiplied by the maximum individual income tax rate applicable to long-term capital gain, with a parallel rule for corporations.

That raw figure is then adjusted. The regulation requires the amount to reflect any reduction under a US income tax treaty, the effect of any nonrecognition provision applicable to the transaction, any losses realized and recognized on previous dispositions of US real property interests, any amount required to be treated as ordinary income, and any other factor that may increase or reduce the tax. For an exchange with boot, the nonrecognition adjustment is the big one: the gain subject to tax drops from the whole realized gain to the recognized gain under section 1031(b).

Paragraph (c)(3) covers the second element. If the seller bought the property from a foreign person and failed to withhold at that time, the amount it should have withheld is added to the maximum tax liability so the current withholding can satisfy it. The Form 8288-B instructions for line 8 say you must either calculate that liability or prove it does not exist, for example with the non-foreign certificate you received when you bought.

The rate the IRS uses is the maximum, and recapture comes first

The regulation says maximum rate, not your rate. For 2026, section 1(h) tops out at 20% on long-term capital gain, with Rev. Proc. 2025-32 placing the 15% band for a single filer at taxable income up to $545,500, and unrecaptured section 1250 gain from depreciation on the building is capped at 25%. The ordinary-income adjustment in paragraph (c)(2) is where recapture enters: the calculation has to identify amounts to be recaptured for depreciation or other items, which the Form 8288-B instructions list as the third item of required evidence.

Because recognized gain in a partial exchange is treated as unrecaptured section 1250 gain first to the extent of prior depreciation, a modest amount of boot on a long-held rental is often taxed at the 25% ceiling rather than 15% or 20%. The IRS may compute the maximum conservatively; the certificate is a withholding figure, and your return settles the actual tax.

Hypothetical: $100,000 of cash boot on a $1,000,000 sale

A nonresident sells a rental for $1,000,000 with an adjusted basis of $600,000, having claimed $150,000 of depreciation, and takes $100,000 of cash at closing while exchanging the rest. All figures are hypothetical and rounded; have your preparer run the calculation on your own depreciation schedule.

Gain realized is $400,000. Under section 1031(b), gain recognized is limited to the $100,000 of money received. Because prior depreciation exceeds that amount, the whole $100,000 is unrecaptured section 1250 gain, and the maximum tax at 25% is $25,000. With no unsatisfied withholding liability, the application on line 7b shows a maximum tax liability of $25,000 against statutory withholding of $150,000. The buyer withholds $150,000 at closing, and when the certificate issues it pays $25,000 to the IRS within 20 days of the mailing date and releases $125,000.

Where the $125,000 goes matters. Released inside the exchange period to the intermediary, it can buy replacement property. Released to the seller after the exchange has closed, it is more cash in the seller's hands, with the consequences described on leftover cash after an exchange.

What the application must contain, and when it must be filed

For line 7b the Form 8288-B instructions require a calculation of the maximum tax, a statement signed by the transferor under penalties of perjury that the calculation and the supporting evidence are true, and evidence of each element: the amount to be realized, usually the signed contract; the adjusted basis, through closing statements, invoices for improvements and depreciation schedules, or a statement of why depreciation was not allowed; amounts to be recaptured; and evidence of any treaty reduction. If personal property is in the price, a schedule with fair market values is needed too.

The deadline does not move. Reg. section 1.1445-1(c)(2) excuses the buyer from paying over the 15% within 20 days only when the application is in on or before the transfer date and the seller has notified the buyer in writing. The IRS withholding certificates page says the IRS generally acts within 90 days of a complete application with every party's TIN. What happens while it is pending is on certificate timing.

Where the DST option changes the boot

Boot in a foreign owner's exchange often comes from debt: a mortgage paid off at closing that is not replaced. A financed DST carries non-recourse debt that counts toward replacement value, and an all-cash DST does not, so the choice between them changes the recognized gain and therefore the certificate calculation. Both are illiquid and can lose principal, and the trust becomes a withholding agent for its foreign owners, as set out on DSTs for foreign investors.

The section 897 statement filed with Form 1040-NR must report the amount of any gain recognized and any tax withheld, so the certificate calculation and the return should match. The full return requirements are on whether a nonresident alien can do a 1031 exchange.