US Tax law requires that a non-resident alien who sells an interest in US real property is subject to withholding, for tax purposes, of 15% of the gross sales price (i.e. $45,000 on a property with a sales price of $300,000. This withholding is retained in the event of a tax liability on the sale of the property or released where there is no tax or less tax to pay.
In order to obtain an early refund of withholding an application for early release of FIRPTA withholding must be submitted to IRS on or before the closing date – the timing is critical. You must have a US taxpayer identification number (ITIN) or submit applications along with the filing. If you have rented your property annually US income tax returns must have been filed to report the income and expenditure.
To ensure a smooth closing and return of funds it is important to retain copies of supporting documentation during ownership of the property. The following list is not exclusive
Settlement statement or contract from purchase of property
Tax returns filed
Receipts for major items of furnishing, maintenance or repair such as furniture package invoice, replacement furniture, air conditioner, landscaping etc.
If the property was originally purchased from a nonresident seller then request copies of the withholding certificate and/or Forms 8288 and 8288A from the Closing Agent (usually a Title Company or Attorney).
Capital gains tax is payable on the net gain from the sale of property. The gain is calculated by taking the sale price less the purchase price and all related costs incurred in the purchase and sale of the property. Other costs such as furnishings (used in rental property) which are included in the sale price are also deducted before calculating the gain. If the property has been used to generate rental income then depreciation and passive activity losses will also be used in the capital gains tax calculation. The overall gain is taxed according to whether the disposed asset was owned for less than or more than twelve months.
If the asset is owned for less than one year, regular income tax rates are applied to the amount of gain.
If the asset is owned for greater than one year, capital gains tax rates are applied to the amount of gain – zero for gains that would otherwise be taxed at the 10% or 15% rates, 15% for gains that would be taxed at the 25%, 28%, 33% or 35% and 20% for gains that would be taxed at the 39.6% rate.
For further information on an upcoming sale or to arrange a seminar please contact Nena Mills at FIRPTA@hbitax.com
FIRPTA withholding https://hbitax.com/resource/firpta-foreign-investment-in-real-property-tax-act-witholding/
Capital gains tax https://hbitax.com/resource/capital-gains-tax/
