A Guide to Selling US Property for Foreign Residents & Expats
Perhaps you moved abroad a few years ago but kept your home in the US because you were unsure what the future held for you. But now, you’ve firmly settled abroad for the foreseeable future and are ready to sell your US house. Or maybe you invested in US property as a foreign national, and you’re ready to sell. Will you owe tax when you sell US property as a foreign resident? How do you report the sale on your US tax return?
The Tax Ramifications of Selling US Property
In general, when you sell real estate, you will have a capital gain or loss. To calculate the gain or loss, you deduct the “cost basis” (what you paid when you purchased the property) from the “net proceeds” (what you receive from the sale). If the result is negative, it is a capital loss. If it is positive, it is a capital gain. Other factors, such as the cost of improvements made to the property and costs of the sale, will likely figure into this calculation. Your HUD-1 settlement statements from both the home purchase and sale will be helpful in determining these amounts.
Special Rules for When Foreigners Sell US Property
Under the Foreign Investment Real Property Tax Act (FIRPTA), when a US non-resident sells real property, 15% of the gross sale price will automatically be withheld for the IRS. The provision is intended to prevent foreign persons from evading US income taxes on the real estate sale. If the foreign seller expects to owe less than the standard 15% withholding, they may ask the IRS to reduce this amount.
The standard FIRPTA withholding rate is 15% of the gross sale price. However, this drops to 10% if the buyer is an individual, the sale price is between $300,000 and $1 million, and the buyer intends to use the property as a personal residence (occupying it at least 50% of the days it’s in use over the next 2 years).
- If all 3 conditions above are met, the buyer withholds 10% instead of 15%.
- If any condition is not met, then the default 15% withholding applies.
The withheld amount must be reported and paid using:
- Form 8288 – U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
- Form 8288-A – Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests
Both the buyer and seller must have valid Taxpayer Identification Numbers (TINs) included on these forms.
Reducing Tax with the Main Home Exclusion
If you have a capital gain from the sale, the next question is: will it be taxable? While the Internal Revenue Code allows an exclusion of up to $250,000 of gain ($500,000 if married filing jointly) from the sale of your main home, what if you haven’t lived in your US property for several years? Can you still qualify for the exclusion?
In order to be eligible for the main home sale exclusion, you must meet both the ownership requirement and the residency requirement. These requirements state that you must have owned and lived in the home for at least two of the past five years leading up to the sale date. Additionally, you may only use the main home sale exclusion once during a two-year period.
The two years of ownership and the two years of residence do not have to coincide. Neither of the two-year periods needs to be a continuous block of time. If married filing jointly, only one spouse needs to meet the ownership requirement, but both spouses must meet the residency requirement in order to use the $500,000 joint exclusion. If only one spouse meets the residency requirement, the qualifying spouse is the only one who can utilize the exclusion, meaning that the exclusion is limited to $250,000 instead of $500,000.
If the seller anticipates owing less tax than the standard withholding amount, they may apply for a withholding certificate by filing IRS Form 8288-B. This form requests the IRS to authorize a reduced or zero withholding amount.
To be considered, Form 8288-B must be submitted before or on the day of closing. If the form is pending, the buyer must still withhold the 15% but may delay remitting it to the IRS for up to 20 days after the IRS responds with a decision.
Extenuating Circumstances Will Be Considered
Selling US property for non-residents is complex, so you’ll want to consider the following extenuating circumstances. If you do not meet the Main Home Exclusion test due to extenuating circumstances, you may still qualify for a partial exclusion based on the time you owned and resided in the home. These extenuating circumstances include a move due to health issues, a change in workplace location, or an unforeseen event.
Health-Related Move
You meet the requirements to be able to use part of the exclusion if any of the following transpired while you owned and resided in the home:
- You moved to better treat or diagnose yourself or a family member’s illness or injury
- You moved to help care for an ill or injured family member
- Your doctor recommended that you move your residence due to a health problem.
Work-Related Move
You meet the requirements to be able to use part of the exclusion if any of the following transpired while you owned and resided in the home:
- You took a job that was 50 miles further away than your old job was. For example, your old work location was 25 miles from home, and your new work location is at least 75 miles from home.
- You didn’t have a prior work location, and you started a job 50 miles or more from your home.
Unforeseeable Events
You meet the requirements to be able to use part of the exclusion if any of the following transpired while you owned and resided in the home:
- The house was destroyed or condemned.
- There was a casualty in the home due to natural or man-made disasters or terrorism.
- Someone who resided in the home died, divorced or was legally separated, gave birth to two or more children from the same pregnancy, became eligible for unemployment, was no longer able to pay basic living expenses.
How to Report on US Property Sales
You generally need to report the home sale on your tax return for the year in which the sale occurred if you received Form 1099-S or if you don’t meet the requirements for the main home sale exclusion (in other words, if there is a taxable gain). Form 1099-S, “Proceeds from Real Estate Transactions,” is issued by the real estate closing agent. In these cases, you report the sale on Form 8949, “Sales and Other Dispositions of Capital Assets” of your federal tax return.
Note that different rules apply if you rent out your home at any point during the five-year period leading up to the sale. Additionally, you will likely need to report the sale on a tax return for the state in which the home was located.
Foreign sellers generally report the sale on Form 1040-NR and must attach the IRS-stamped copy of Form 8288-A to claim credit for the FIRPTA tax withheld.
Want Help With Selling US Property for Expats?
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