Tax Considerations When Selling U.S. Real Estate as a Non-Resident

April 29, 2025
Tax Considerations When Selling U.S. Real Estate as a Non-Resident

Introduction

Selling U.S. real estate as a non-resident alien (NRA) involves complex tax regulations that can significantly impact the final proceeds. The Foreign Investment in Real Property Tax Act (FIRPTA) requires withholding tax on the sale, and non-resident sellers must also navigate capital gains taxes, reporting obligations, and potential exemptions.

 

Without proper tax planning, non-residents can face higher tax burdens, delayed refunds, and compliance penalties. This article provides a detailed guide on how non-residents can efficiently manage tax obligations when selling U.S. real estate.

 

1. Understanding FIRPTA Withholding Tax

The Foreign Investment in Real Property Tax Act (FIRPTA) mandates that the buyer withhold a percentage of the gross sale price when purchasing U.S. real estate from a non-resident seller.

  • The standard withholding rate is 15% of the gross selling price.
  • For properties sold for $300,000 or less where the buyer intends to use the property as a residence, withholding may be exempt.
  • If the sale price is between $300,000 and $1 million, the withholding rate may be 10% if the property will be used as the buyer’s residence.

 

2. Calculating Capital Gains Tax

Non-residents are subject to U.S. capital gains tax on the profit realized from selling U.S. property.

  • The capital gain is calculated as the difference between the sale price and the adjusted cost basis (purchase price plus improvements and less any depreciation).
  • The long-term capital gains tax rate for non-residents is typically 15% or 20%, depending on the total gain.
  • Short-term gains (from properties held for less than a year) are taxed at the ordinary income tax rate, which can be higher.

 

3. Filing Tax Returns and Claiming Refunds

  • Non-residents must file Form 1040-NR (U.S. Nonresident Alien Income Tax Return) to report the sale and calculate the actual tax owed.
  • If the FIRPTA withholding exceeds the actual tax liability, the seller can claim a refund after filing the tax return.
  • Form 8288 and Form 8288-A are used by the buyer to report and remit the withheld taxes to the IRS.
  • The seller receives Form 8288-A to include with their tax filing.

 

4. Reducing FIRPTA Withholding with Form 8288-B

  • Non-residents can apply for a withholding certificate using Form 8288-B to request reduced or zero withholding.
  • The application must be submitted before the transfer date.
  • If the IRS approves the reduced withholding, the buyer will withhold only the required amount, avoiding excess withholding and long refund delays.

 

5. Potential Deductions and Tax Reductions

  • Non-residents can deduct selling expenses, including agent commissions, legal fees, and necessary improvements.
  • Tax treaties between the U.S. and the seller's home country may reduce the effective tax rate.
  • If the property qualifies as a personal residence under IRS guidelines, additional exemptions may apply.

 

6. Common Mistakes to Avoid

  • Failing to file Form 8288-B early enough can result in unnecessary withholding.
  • Ignoring the requirement to file Form 1040-NR and claim refunds.
  • Overlooking deductible expenses, leading to higher tax liabilities.
  • Not considering estate tax implications, which can apply if non-residents hold significant U.S. assets.

 

Conclusion

Selling U.S. real estate as a non-resident involves navigating FIRPTA withholding, capital gains taxation, and IRS reporting requirements. Proper tax planning and documentation can significantly reduce tax liabilities and maximize net proceeds. 

 

Tax Partners can assist non-residents in minimizing tax burdens, filing necessary forms, and ensuring compliance with U.S. tax regulations.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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