Non-Resident U.S. Tax Return Filing: Selling U.S. Property

Before 1981, U.S. residents paid taxes on the disposition of U.S. properties, while non-residents were generally exempt. According to the IRS, a disposition “includes but is not limited to a sale or exchange, liquidation, redemption, gift, transfers, etc.”

FIRPTA (the Foreign Investment in Real Property Tax Act) was enacted in 1980 to treat these situations comparably and pay tax, with certain exemptions, on the disposition of U.S. property (real estate), including vacation property or vacant land, by U.S. non-residents.

1 Determine Your Withholding Rate & Capital Gain or Loss

The standard withholding rate is 15% of the capital gain on the sale of your property. In certain cases, however, you may be eligible for an exemption or a reduction of this rate. See Withholdings & Exemptions and Capital Gains for more information.

2 Complete and Submit the FIRPTA Compliance Forms

The buyer or buyer’s agent completes and submits these forms, along with a cheque for the withholding amount, to the IRS.

  • FIRPTA Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288 reports the amount of taxes withheld on the sale of property by foreign nationals. The purchaser completes the form and remits it, along with the amount withheld, to the IRS within 20 days after the sale is closed.

  • FIRPTA Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288-A is completed by the purchaser or the purchaser’s withholding agent. A separate form is required for each seller who had tax withheld.

There are three copies of Form 8288-A. Two copies, along with Form 8288, are sent to the IRS, while the buyers keep the third copy.

3 ITIN (Individual Taxpayer Identification Number

If you have a valid ITIN, the IRS will:

  • Verify the details of the withholding and the cheque submitted by your title/escrow company.
  • Apply the withheld amount to your account using your ITIN.
  • Send you Form 8288-A (your final tax slip) with a locator number. This slip is required to file your U.S. tax returns.

If you do not have a valid ITIN:

  • Apply for it as soon as possible after the closing of your sale. According to the IRS, “You will receive a letter from the IRS assigning your tax identification number usually within seven weeks if you qualify for an ITIN and your application is complete.” We have found, though, that it usually takes several weeks longer.
  • You are required to provide the IRS with your original passport or two other original documents proving your identity. To streamline the process, we can certify your identity and prepare your ITIN application.
  • The amount withheld is not applied until you have notified the IRS of your new ITIN.

The IRS will send you Form 8288-A (your final tax slip) with a locator number. This slip is required to file your U.S. tax returns.

Filing Your Non-Resident U.S. Tax Return

Once you have obtained your ITIN, you must report it to the IRS, who will:

  1. Apply the withholding tax to your account.
  2. Mail you a final tax slip.

Once you have received your tax slip, you are ready to file your:

  • Form 1040-NR, U.S. Nonresident Alien Income Tax Return.
  • Personal tax return for your property’s state. Note: Some states do not have state income tax.

You should file your U.S. tax return before filing your tax return for your country of residence. The following information is required to be submitted with your U.S. tax return:

  • Your ITIN Number
  • Copy of the final 8288-A with the stamped control number across the top
  • Final settlement statement (property sale)
  • Final settlement statement (property purchase)
  • Capital improvements during the period of property ownership
  • Number of days each seller was physically present in the U.S. for the preceding three years

Tax Rates on Capital Gains

The capital gains tax rate is based on three factors:

1 Your Period of Property Ownership

Ownership for up to 365 days is a short-term capital gain and will be taxed as ordinary income. The premise of this treatment is that the property was purchased with the intention of flipping it.

Ownership for over 365 days will qualify for a preferential capital gains rate.

2 Your Income Range & Tax Bracket

Your tax bracket is based on the total amount of your U.S. income. For short-term capital gains, the tax rate ranges from 10% to 37%. For long-term capital gains, the rate will be 20% or less.

3 The Use of Your Property

In most cases, U.S. non-residents are selling vacation homes. The rates above apply to these sales.

If you are also a U.S. resident or citizen, or under certain other use tests, you may qualify for a partial or full capital gains tax exemption.

If the property qualifies as your U.S. principal residence, up to $250,000 may be excluded if you have used it as your primary residence for at least two of the five years before the sale.

U.S. Tax Return Deadline

The general deadline for non-residents is June 15 in the year following your tax year-end, which is normally the end of the calendar year. However, if there is any tax payable, the tax owing must be paid by April 15.

If required, you may apply for a filing extension using Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. This extension, however, is only for filing. If you have taxes payable, they must be paid by April 15.

FIRPTA GLOBAL: U.S. Income Taxes Done Right

Your U.S. personal tax returns should be prepared by someone knowledgeable about the required documentation and information with respect to FIRPTA. If the requirements aren’t met, this could cause serious delays, late filing penalties, and interest charges.

As FIRPTA and U.S. tax experts, we’ll make sure that your tax filing is done right so you can breathe easy.

Let FIRPTA GLOBAL Handle Your FIRPTA Needs

Our services can be provided virtually or in person. Contact us to start the process!

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