Do state withholding and FIRPTA both apply to a foreign seller in a 1031 exchange?

Two hold-backs, two exemptions, no credit between them

A withholding state is collecting an advance on its own income tax from a seller it may never see again, which describes a foreign owner exactly. The states that do it, their rates and their exchange forms are listed on which states withhold at closing, and the general mechanics for any exchanger are on whether the state withholds despite a 1031. This page is about what changes when the seller is also a foreign person.

What changes is arithmetic and paperwork, not principle. The federal rule under section 1445 and the state rule run in parallel. The buyer, or the state's designated withholding agent, sends the state its share; the buyer withholds the federal share; each amount is a deposit against a different tax, credited on a different return. A certificate from the IRS reducing FIRPTA withholding is not a document any state recognises, and a state exemption affidavit is not something the IRS has ever seen.

In a state with no income tax there is no state hold-back at all, but a foreign seller still faces FIRPTA, because section 1445 is federal and applies to every US real property interest wherever it sits.

California: Form 593 reaches every seller, and the intermediary withholds on boot

The 2026 Form 593 instructions open with the rule: withholding is required when California real estate is sold or transferred, and the real estate escrow person must notify buyers of the requirement. The default is 3 1/3% of the total sales price. Nothing in the rule turns on residence, so a foreign owner is treated like any other seller, and the form accepts an ITIN where the seller has no Social Security number.

The exchange exemption is specific. The instructions say a deferred like-kind exchange is exempt from withholding at the time of the initial transfer, but if the seller receives money or other property beyond the like-kind property exceeding $1,500, the qualified intermediary must withhold, and if the exchange does not take place or does not qualify for nonrecognition, the intermediary or accommodator must withhold 3 1/3% of the sales price. The line-by-line is on California Form 593 for a 1031 exchange.

For a foreign seller the sequence at closing is therefore: Form 593 with the exchange line signed, so no state money leaves escrow, and Form 8288-B already filed, so the federal 15% is held by the buyer rather than sent to the IRS. The intermediary receives the rest. California's annual Form FTB 3840 then follows the deferred gain if the replacement is outside the state, as the same instructions note.

Hawaii: a foreign owner is a nonresident person, and Form N-289 is all or nothing

The Instructions for Form N-288 impose a 7.25% withholding obligation on the buyer when a Hawaii real property interest is acquired from a nonresident person, and define nonresident person as every person other than a resident person. A Canadian, a Japanese corporation or a nonresident alien living in Oregon all fall on the nonresident side of that line.

The same instructions excuse the buyer when the seller furnishes Form N-289 certifying that, by reason of a nonrecognition provision of the Internal Revenue Code as operative under Hawaii's chapter 235, no gain or loss is recognized. The details, including why any recognized gain disqualifies the form and the Form N-288B certificate and N-288C refund routes, are on Hawaii HARPTA and Form N-289.

The stacking is at its most visible here: 15% federal plus 7.25% state is 22.25% of the price held back on a Honolulu sale where neither exemption is in place. With Form N-289 accepted and Form 8288-B filed by closing, the state takes nothing and the federal 15% sits with the buyer.

The two exemptions run on different clocks, and boot is treated differently

The state side is usually settled at the closing table. Some states require the exemption to be approved before closing, on timelines the states overview sets out, but once the form is accepted the state's claim is suspended. The federal side is never settled at closing: the buyer withholds, the application sits with the IRS for around 90 days, and your 45-day and 180-day periods run meanwhile, as explained on certificate timing.

Boot splits the two regimes further. California has the intermediary withhold on cash boot above $1,500 when it is distributed. The IRS instead adjusts the certificate: with recognized gain, the application is made on the maximum tax liability basis, which is on the FIRPTA certificate when an exchange has boot. Hawaii simply refuses the exemption and withholds the full 7.25%, leaving a refund claim.

Hypothetical: a $1,000,000 Honolulu rental sold by a nonresident

A foreign owner sells a Honolulu rental for $1,000,000 and plans a full exchange. All figures are hypothetical and rounded; check them against your own closing statement with your intermediary and CPA.

With Form N-289 accepted by the buyer and Form 8288-B filed a week before closing, the state withholds nothing, the buyer holds $150,000 pending the IRS, and the intermediary receives $850,000. If the owner expects to take $50,000 of cash at closing, Form N-289 is unavailable, the buyer withholds $72,500 for Hawaii and $150,000 for the IRS, and the intermediary receives $777,500 while the $50,000 goes to the seller as boot. The federal application, filed on the maximum tax liability basis, would later reduce the $150,000 to the tax on the $50,000 of recognized gain; Hawaii's $72,500 waits for Form N-288C or the Hawaii return.

A checklist for a foreign seller closing in a withholding state

Citizens living abroad face only the state side of this, as the planned guide for US expats selling a rental explains, because a citizen is not a foreign person for FIRPTA.

• Identify the state's withholding form and its exchange exemption, and file or sign it on the state's timeline, which may be weeks before closing.
• File Form 8288-B with the IRS on or before the transfer date and give the buyer written notice; this is independent of anything the state requires.
• Decide before closing whether any cash will come out, because boot costs you the Hawaii exemption outright and triggers intermediary withholding in California.
• Keep the two refund paths separate: state withholding is reclaimed on the state nonresident return, FIRPTA on Form 1040-NR line 25f.
• If the replacement is a DST holding property in another income-tax state, expect that state's nonresident return each year.