Sale Of U.S. Real Property For Nonresident Alien
The sale of U.S. real property by a nonresident alien is nearly identical to U.S. real property sold by a resident alien or U.S. citizen. The only difference is that of withholding.
Internal Revenue Code Section 1445 imposes a 10% withholding tax on the sale of U.S. real property by a U.S. nonresident alien. The income tax only applies to the amount realized on the sale, which includes cash paid and debt assumed on the sale.
However, the rate of withholding is 10% of the gross selling price of the U.S. real property. Therefore, it is very common for the withheld tax to be well in excess of the ultimate U.S. income tax. An exception to this withholding requirement is when a nonresident alien sells the property to a person who is planning on living in the property and using it as his/her principal residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.
For this exception to apply, the sales price of the property cannot exceed more than $ 300,000. As it is the buyers responsibility to withhold these funds, the buyer or transfer agent may insist on withholding this tax.
If the before mentioned exception does not apply, you may submit an application for a withholding certificate or an application for early refund to the Internal Revenue Service (IRS) to reduce or eliminate the 10% withholding tax on the sale. In both cases, the basis of the application of the application is that the actual tax liability is less than the amount withheld. An application for a withholding certificate must be prepared prior to the sale closing.
The closing agent will withhold the 10% and retain it in an escrow account until the IRS responds to the application, usually 90-120 days. Upon receipt of IRS approval of the application, the appropriate amount of income tax due (if any) will be paid over to the IRS and the balance of the amount withheld will be returned to the seller. Thus, a withholding certificate filed before a transfer notifies the closing agent that a reduced or zero withholding amount is required and that the remittance of the withholding to the IRS is suspended until further notice.
An application for early refund is similar to an application for withholding certificate except that is submitted after a closing and remittance of the 10% withholding tax to the IRS. If this application is approved, the appropriate amount of withholding tax is refunded to the seller usually within 120-150 days.
Alternatively, a U.S. nonresident Income Tax Return (Form 1040NR) can be filed once the calendar year has ended. Form 1040NR reports the sale of U.S. real property, calculates the actual income tax due and has the balance, if any, refunded to the seller.
Regardless of whether or not you submit an application for withholding certificate or any application for early refund, Form 1040NR is required to be filed to report the sale of U.S. real property once the calendar year ends.