How does a non-resident alien sale of real property work? Here’s the scoop…
US resident aliens are subject to US federal income tax on their worldwide income, whereas US nonresident aliens (as well as foreign partnerships, foreign estates, foreign trusts, and foreign corporations) are generally subject to US federal income tax on their US income only.
Because in a non-resident alien sale of real property there exists the potential for difficulty in collecting tax from foreign persons, the US federal income tax withholding rules are designed to address this potential difficulty. Specifically, when a non-resident alien sale of real property happens, the withholding agent, often a title company, withholds 20% (up from 10%) of the sale proceeds of the sale.
There may also be a reduced rate of withholding specified in a tax treaty between the US and the seller’s country of residence. Withholding is not required if the buyer purchases the real property for use as a residence, as long as the amount realized is not more than $300,000.
The tax withheld is credited towards the foreign person’s tax liability when the foreign person subsequently files their tax return. And in particular, the fact that 20% of the sale proceeds is withheld does not excuse the seller from filing a US federal tax return.
If the property in the non-resident alien sale of real property was the seller’s primary residence, sec 121 applies, and up to $250,000 of gain is excluded from income. It is not clear if this exclusion applies if the seller is a covered expatriate.
If the sellers file a joint return, that amount is $500,000. Note that a joint return may not be filed if the sellers are nonresident aliens at the end of the year of the sale.
Withholding can be avoided by filling out Form 8288B or by requesting an early refund.