When considering selling property in the US, especially if you’ve been living abroad, understanding the tax implications as a non-resident is paramount. Whether you initially retained your US home due to uncertainty about your long-term plans or invested in US property as a foreign national, navigating the tax ramifications of the sale, including how to report it on your US tax return, is a critical step. This guide aims to provide a comprehensive overview of the tax landscape for foreign residents selling US real estate.
The Tax Ramifications of Selling US Property
In the United States, the sale of real estate typically results in either a capital gain or a capital loss. To determine this, you subtract the “cost basis” (the original purchase price of the property) from the “net proceeds” (the amount you receive from the sale after deducting relevant selling expenses). If this calculation yields a positive result, you have a capital gain; a negative result indicates a capital loss. Several factors can influence this calculation, including the cost of significant improvements made to the property during your ownership and various costs associated with the sale itself, such as real estate agent commissions and legal fees. Your HUD-1 settlement statements, both from the original purchase and the subsequent sale, will be invaluable documents in accurately determining these amounts for your tax calculations.
Special Rules for Foreigners Selling US Property: FIRPTA Withholding
A crucial aspect for non-resident foreign sellers of US real property is the Foreign Investment in Real Property Tax Act (FIRPTA). Under FIRPTA, when a US non-resident sells real property, a significant portion of the gross sale price is automatically withheld by the buyer and remitted to the IRS. This provision is designed to ensure that foreign individuals or entities do not evade US income taxes on the profit generated from real estate sales. The standard FIRPTA withholding rate is 15% of the gross sale price. This means that 15% of the total amount the buyer pays for the property is set aside directly for the IRS, rather than being fully disbursed to the seller at closing.
It’s important for both the buyer and seller to be aware of the FIRPTA requirements and ensure compliance. The withheld amount must be accurately reported and paid to the IRS using specific forms: Form 8288 – U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests and Form 8288-A – Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Both the buyer and the seller are required to have valid Taxpayer Identification Numbers (TINs) included on these forms, which is a critical step for proper reporting and claiming any credit for the withheld tax.
Understanding FIRPTA Withholding Variations
While the standard FIRPTA withholding rate is 15%, there are specific conditions under which this rate can be reduced. The withholding rate drops to 10% if three stringent conditions are collectively met:
- Buyer is an individual: The purchaser of the property must be an individual, not a corporation, partnership, or other entity.
- Sale price is between $300,000 and $1 million: The gross sale price of the property must fall within this specific range.
- Buyer intends to use the property as a personal residence: Crucially, the buyer must provide a sworn statement that they intend to use the property as their personal residence, meaning they will occupy it for at least 50% of the days it is in use over the next two years following the sale.
If all three of these conditions are satisfied, the buyer is only required to withhold 10% of the gross sale price. However, if any of these conditions are not met, the default 15% withholding rate will automatically apply. It is the buyer’s responsibility to ensure proper withholding, and sellers should be proactive in understanding how these rules apply to their specific transaction to avoid unexpected deductions.
If a foreign seller anticipates that their actual tax liability on the capital gain will be less than the standard 15% withholding amount (for instance, due to significant original cost basis or allowable expenses), they may apply for a withholding certificate from the IRS. This involves filing IRS Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. This form requests the IRS to authorize a reduced or even zero withholding amount. To be considered, Form 8288-B must be submitted to the IRS before or on the day of the closing. If this form is pending at the time of closing, the buyer is still obligated to withhold the 15% (or 10% if applicable) but may delay remitting these funds to the IRS for up to 20 days after the IRS issues a decision on the withholding certificate application. This delay provides a window for the seller to potentially receive a reduced or no withholding amount if their application is approved.
Reducing Tax with the Main Home Exclusion
Once a capital gain from the sale has been calculated, the next critical question is whether it will be taxable. The Internal Revenue Code provides a significant tax exclusion for the sale of a “main home”: up to $250,000 of gain for individual filers, and up to $500,000 for those married filing jointly. However, qualifying for this exclusion when you haven’t lived in your US property for several years can be complex.
To be eligible for the main home sale exclusion, you must satisfy both an ownership requirement and a residency requirement. These requirements state that you must have owned and lived in the home for at least two out of the five years immediately preceding the date of the sale. It’s important to note that these two years of ownership and two years of residence do not necessarily have to be continuous blocks of time, nor do they need to coincide with each other. For married couples filing jointly, only one spouse needs to meet the ownership requirement, but both spouses must meet the residency requirement to utilize the full $500,000 joint exclusion. If only one spouse meets the residency requirement, the exclusion is limited to $250,000. Additionally, this main home sale exclusion can only be used once within any two-year period.
Extenuating Circumstances and Partial Exclusion
Selling US property as a non-resident can indeed be complex, and the IRS recognizes that unforeseen circumstances may prevent sellers from meeting the standard main home exclusion tests. If you do not fully qualify for the main home exclusion due to extenuating circumstances, you may still be eligible for a partial exclusion based on the time you did own and reside in the home. These extenuating circumstances are generally categorized into health-related moves, work-related moves, or unforeseeable events.
Health-Related Move: You may qualify for a partial exclusion if any of the following occurred while you owned and resided in the home:
- You moved to facilitate the diagnosis, treatment, or mitigation of a disease, illness, or injury for yourself or a family member.
- You moved to provide medical care for a qualified family member suffering from a disease, illness, or injury.
- A physician recommended that you change your residence due to a health problem.
Work-Related Move: A partial exclusion may be possible if:
- Your new place of employment was at least 50 miles further from your home than your old work location (e.g., if your old job was 25 miles away, the new one must be at least 75 miles from home).
- You did not have a prior work location, and your new job is at least 50 miles or more from your home.
Unforeseeable Events: A partial exclusion may also apply if any of the following transpired while you owned and resided in the home:
- The house was destroyed or condemned.
- There was a casualty in the home due to natural or man-made disasters (e.g., fire, flood, hurricane) or acts of terrorism.
- Someone who resided in the home died, divorced or was legally separated from the owner, gave birth to two or more children from the same pregnancy, became eligible for unemployment compensation, or was no longer able to pay basic living expenses due to unforeseen circumstances.
These provisions offer crucial flexibility for sellers who, through no fault of their own, cannot meet the strict residency requirements for the full exclusion.
Reporting US Property Sales on Your Tax Return
You are generally required to report the home sale on your US tax return for the year in which the sale occurred if you received Form 1099-S, “Proceeds from Real Estate Transactions,” from the real estate closing agent, or if you do not meet the requirements for the main home sale exclusion (i.e., if there is a taxable gain). In such cases, the sale is reported on Form 8949, “Sales and Other Dispositions of Capital Assets,” which is part of your federal tax return.
It’s important to note that different rules apply if you rented out your home at any point during the five-year period leading up to the sale, as this can affect the main home exclusion calculation. Additionally, you will likely need to report the sale on a tax return for the specific state in which the home was located, as state tax laws can differ from federal ones.
For foreign sellers, the sale is generally reported on Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Crucially, you must attach the IRS-stamped copy of Form 8288-A to this return to claim credit for the FIRPTA tax that was withheld at closing. Failure to do so could result in the IRS not recognizing the withheld amount. Given the intricacies of international tax law and the specific requirements for non-resident sellers, it is always advisable to consult with a qualified US tax specialist to ensure full compliance and optimize your tax outcome.
