Applies to: Non-resident aliens (form 1040NR)

If you sell US real property then you have two issues to think about: Withholding tax and a tax return.

US real property, by the way, is not just land and building. It includes any interest in real property other than as a creditor. It includes, among other things:

• Personal property associated with the use of real property, such as furnishings sold with the property. This is quite common with Florida and Arizona vacation properties.
• Shares of a US corporation, where more than 50% of the value is derived from real estate (shares of certain public corporations are exempt).
• An option to purchase real property.

Withholding tax

The purchaser must remit 10% of the gross sale proceeds to the IRS. This applies whether or not the purchaser is a US person or not. However, this FIRPTA withholding can be:

• Eliminated, if the sales price is under US$300,000 and the purchaser warrants that s/he will use it as a principal residence.
• Reduced, if the standard 10% is higher than the actual tax, and the purchaser obtains approval from the IRS, using form 8288.

Filing a return

You must file a US return to report the sale. It doesn’t matter whether there was a gain or a loss on the property, or whether the tax withheld is more than sufficient – you must file the return.

If you have held the property for at least a year, the tax will generally be 15% of the gain, and some may be taxed at only 5%.

This communication is designed for the information only.  Readers should not act on any of the information without seeking professional advice.  This communication does not constitute professional advice.  SF Partnership accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of this information.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.  The foregoing legend has been affixed pursuant to US Treasury Regulations governing tax practice [Circular 230 §10.35]

This entry was posted on Friday, October 31st, 2008 at 5:45 am and is filed under International Real Estate Buyers, Taxation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.