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Selling Your U.S. Real Estate? Here Are Some Things You Need to Know

14/03/2016


If you’re someone who decided to invest in U.S. real estate when the prices were favourable and now you’re ready to cash in on that investment, you’re need to understand the U.S. tax rules that apply to foreign investors.

Sale of real property in the U.S. by a non-resident is subject to the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA will apply an income tax withholding of 10% to 15% on gross proceeds. The purchaser, in conjunction with the escrow company, will act as the withholding agent on the sale. Unless the seller advises whether or not an exemption or reduction of tax applies, the escrow company will submit 10% to 15% of the gross proceeds to the Internal Revenue Service (IRS). There are certain criteria that must be met to have the exemption apply and also mechanisms in place to have the withholding reduced.

The exemption from FIRPTA is:

  • The sales price is less than $300,000 USD; and
  • The purchaser intends to use the property as a principal residence.

If you can’t use the FIRPTA exemption, your next option is to make an application to the IRS to have the withholding reduced to an amount that more closely reflects your actual U.S. tax liability. The application for a withholding certificate can potentially reduce or eliminate your U.S. tax liability by advising the IRS of your anticipated gain or loss on the sale of real property. When approved, the IRS will issue a Withholding Certificate to the applicant which advises of the new withholding amount.

Applications for a Withholding Certificate are made on Form 8288-B, “Application for Withholding Certificate for Disposition by Foreign Persons of US Real Property Interests.” The application must be signed by the individual sellers or corporate officer. A complete application for the Withholding Certificate will include:

  • Name, address and identification number of the transferor(s);
  • Name, address and identification number(s) of the transferee(s);
  • Description of the U.S. real property transaction including:
    • Date of the transfer;
    • Contract price;
    • Use of property at time of sale (rental or commercial; personal; other);
    • Cost of the property (a copy of the Settlement Agreement when the property was purchase should be included with the application);
    • Location and general description of property;
  • Calculation to illustrate the amount of tax the applicant will be subject to, including Alternative Minimum Tax;
  • A copy of the Sales Contract; and
  • Copies of Form 8288 and 8288-A provided by the escrow agent.

If the seller is an individual and they do not have an identification number, they must include Form W-7 “Application for a Taxpayer Identification Number” with Form 8288-B. See my previous blog How to - Obtain an Individual Taxpayer Identification Number​. Each individual must include their own Form W-7 with Form 8288-B if there is more than one individual listed on title.

If the seller is a corporation or a trust and does not have an identification number, Form SS-4 “Application for an Employer Identification Number” must be completed and signed by the corporate officer. A completed SS-4 can be processed over the phone with the IRS.

Completing the application and submitting it the IRS needs to happen in a timely manner. The IRS will generally act on these applications within 90 days after the receipt of a completed application. The seller must notify the purchaser and the escrow company, in writing, that the certificate has been applied for on the day of or the day prior to the transfer. This can be done by providing a copy of the application. The appropriate amount of withholding tax will be held in trust until such time the Withholding Certificate is received from the IRS. The escrow company, or purchaser, has until the 20th day after the day the IRS mails the Withholding Certificate or Notice of Denial to submit the withholding tax.

Of course, depending on the state in which the real property is located, that state may also have rules that mirror the IRS’s FIRPTA withholding act. States such as California and Hawaii have a similar application process to the IRS. Florida and Arizona states do not have a withholding requirement. The requirements should be reviewed on a state-by-state basis.

Even if the seller has met the exception to FIRPTA or has successfully received their Withholding Certificate from the IRS, they are still obligated to file a U.S. tax return to report the disposition of the U.S. real property. For an individual, the tax return will be due by April 15th of the year following the year of the sale. A corporation has until two and a half months after the corporate year end to file the corporate income tax return to report the disposition. The applicable state may also require a tax return to be filed to report the disposition.

To learn more, contact Patty Lebid, CPA, CGA, at 780.451.4406 or [email protected], or your local MNP Tax Advisor.