Are you a nonresident who is planning to sell your US personal home, vacation home, or rental property? If so, you need to understand FIRPTA withholding.
FIRPTA stands for the Foreign Investment in Real Property Tax Act. It is the US law that requires tax withholding on the sale of US real property by foreign sellers. If you are like many nonresidents, the first time you may have heard about FIRPTA was when you put your house on the market—or when you went under contract to sell. FIRPTA can be a big tax surprise in the form of a 10%-15% withholding on the sales price of a property.
For example, on the sale of a $1 million home, the IRS can automatically withhold $150,000 at the time of closing. And this withholding can be held for months, even if no capital gains tax is owed. This is done to ensure that the IRS receives the taxes that may be due.
The real estate (or withholding) agent will send the withholding to the IRS—even if you expect a loss on the sale. Yes, you will get the withholding back, assuming you don’t have a big gain on the sale. But to get the cash, you have to wait until next year, file a US tax return, and request a refund. Not ideal, especially if you had other plans for the money.
So, do you need to just wait for a refund? Not necessarily. There are three options, each with pros and cons. We can help you determine which options you qualify for and walk you through the steps. We can also advise you on the common pitfalls since there can be delays by the IRS or mistakes made by real estate agents or withholding agents.
File an application to reduce or even eliminate the withholding. This involves filing Form 8288-B with the IRS, along with supporting calculations that show the actual tax you expect to owe on the sale. The filing must be done after the property goes under contract but before the closing date. This option helps you avoid an excessive withholding, which can free up your cash flow to do other things.
File a request for early refund of the FIRPTA withholding. If you weren’t able to obtain a Withholding Certificate from the IRS for a reduced amount of withholding, but you don’t want to wait until you file your tax return next year to request a refund, you can apply for an earlier refund. This option may be appropriate in limited circumstances.
Accept the automatic withholding and wait until the following February/March and file a US tax return to claim a refund. Of course, reducing or limiting the withholding in the first place is preferable. But, in cases where it’s not possible, this option may be the right one! It depends on the time of year, IRS backlogs, and other factors.
We help G-4 visa holders and other nonresidents who are selling property by:
- Preparing the proper forms (Form 8288-B, Application for Withholding Certificate), before closing, to reduce or eliminate this withholding requirement
- Preparing supporting documents and calculations for the Form 8288-B, to show the actual expected tax on the sale
- Helping explain to real estate professionals the steps they should follow to help their nonresident sellers obtain reduced withholding
- Filing Forms 843 and 8288-B to request an early refund of the withholding
- Filing income tax returns (Form 1040NR) for the year of the sale to properly report the sale—and to report the withholdings or request the refund
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
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