Perhaps you are a non-U.S. resident who was keen on investing in U.S. real property after the housing market crash, hoping the market would improve and you could profit on the real estate sale after a few years. Or possibly, you are a Canadian who purchased a vacation home in sunny Arizona to escape the harsh winters. Whatever your reason may be for investing in U.S. real estate, you should be aware of your U.S. tax filing responsibilities.
First, if you rent out your U.S. real property, you will need to file a U.S. tax return to report the rental activity. Of course, you may have a tax return filing requirement regardless, if you have any other type of U.S. source income.
When you sell the property, you will need to file a tax return and pay tax on any gain from the sale. If you don’t already have a U.S. social security number or Individual Taxpayer Identification Number (ITIN), you will need to apply for one. As a foreign person selling U.S. real estate, the buyer is required to withhold tax (generally 10%) on the sale unless an exception is met. One exception to withholding is if the sales price is less than $300,000 and the buyer uses the property as a residence for a required period of time. The buyer could be responsible for the withholding tax if tax should have been withheld and was not.
Withholding could be reduced if the seller files Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, and it is accepted by the IRS. A common reason for filing Form 8288-B is if the seller’s tax liability from the sale is less than the amount required to be withheld. In this case, supporting evidence of the sales price, basis, improvements, depreciation, etc. would need to be attached to the 8288-B to support the gain or loss calculation.
It is best to contact a knowledgeable tax professional who can assist with any consultations or tax filing obligations.
By Jill A. Helm, CPA