- Understanding Capital Gains Tax
When you sell a property in the US, you may have a capital gain or loss. This is calculated by subtracting the property’s purchase price (plus any improvements) from the selling price (minus any selling costs). If the result is positive, it’s a gain; if negative, it’s a loss. These gains are typically subject to US capital gains tax.
- FIRPTA Withholding Requirement
The Foreign Investment in Real Property Tax Act (FIRPTA) mandates that when a non-resident sells US real estate, the buyer must withhold 15% of the gross sales price and send it to the IRS. This is to ensure that the IRS collects any taxes owed on the gain. However, this withholding is not the final tax liability; the actual tax owed may be more or less.
- Reducing or Eliminating Withholding
Sellers can apply for a withholding certificate from the IRS to reduce or eliminate the 15% withholding if the actual tax liability is less. This requires submitting Form 8288-B before the sale is completed. If approved, the buyer will withhold the reduced amount.
- Reporting the Sale
Even if you’re a foreign resident, you must report the sale of US property to the IRS by filing a US tax return (Form 1040-NR) for the year of the sale. This return will calculate the actual tax owed on the gain, and you may receive a refund if the withheld amount exceeds your tax liability.
- Importance of Proper Documentation
Keep all records related to the property’s purchase, improvements, and sale, including HUD-1 settlement statements. These documents are essential for accurately calculating your gain or loss and supporting your tax filings.