At Flex Tax and Consulting Group, we understand nonresident aliens’ complexities when dealing with U.S. real estate transactions. Selling property in the United States involves a variety of regulatory and tax obligations that can be daunting. One crucial aspect that nonresident aliens must navigate is compliance with tax laws, specifically using an Individual Taxpayer Identification Number (ITIN). This article provides a comprehensive guide to ensure legal compliance for nonresident aliens selling real estate in the U.S.
What is an ITIN, and Why is it Important?
An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service (IRS) to individuals who are required to have a U.S. taxpayer identification number but who do not have and are not eligible to obtain a Social Security Number (SSN). For nonresident aliens, having an ITIN is essential for fulfilling tax responsibilities associated with the sale of U.S. property.
Key Critical and Tax Compliance Considerations
- FIRPTA and ITIN:
The Foreign Investment in Real Property Tax Act (FIRPTA) stipulates that when a nonresident alien sells U.S. property, the buyer must withhold 15% of the gross sale price. This amount must be remitted to the IRS as a precaution against the seller’s potential tax liability. To properly report and remit this withholding, both the buyer and the seller must reference the seller’s ITIN.
- Applying for an ITIN:
If a nonresident alien does not already have an ITIN when planning to sell a property, they must apply for one using Form W-7, “Application for IRS Individual Taxpayer Identification Number.” This form should be submitted in conjunction with the federal tax return that reports the sale of the property and related expenses.
- Capital Gains Tax:
Nonresident aliens are subject to U.S. capital gains tax on the profit made from the sale of U.S. real estate. The ITIN is necessary for filing the tax return that includes the capital gains calculation. The gain is determined by subtracting the property’s cost basis from the selling price.
- State and Local Taxes:
Beyond federal tax obligations, nonresident aliens must consider state and possibly local taxes. These can vary significantly and may also involve withholding requirements. An ITIN will be required for any state or local tax filings if the state tax authority does not issue its own taxpayer identification numbers.
- Reducing FIRPTA Withholding:
Nonresident aliens may seek to lower or waive the FIRPTA withholding if their anticipated tax liability from the property sale is less than 15% of the selling price. To achieve this, one must apply to the IRS for a withholding certificate (Form 8288B) to reduce or eliminate FIRPTA withholding, providing the seller’s ITIN as part of the application. This application must be processed before the closing date of the transaction. We advise initiating this process well in advance, as it typically takes the IRS between three to six months to issue a withholding certificate (Form 8288B). Importantly, once the property is in escrow, there is a strict 20-day deadline to complete this process. Thus, timely action is crucial to ensure compliance and avoid delays.
Reporting and Compliance
The sale of the property and any associated tax obligations must be reported to the IRS:
- Form 1040-NR: This form is used by nonresident aliens to report income from U.S. sources, including gains from the sale of U.S. real estate.
- Forms 8288 and 8288-A: The buyer uses these forms to report and remit the withheld FIRPTA amount to the IRS.
Conclusion
Selling U.S. property as a nonresident alien involves intricate tax regulations and compliance requirements. An ITIN plays a central role in ensuring that all legal obligations are met, from FIRPTA withholding to reporting capital gains. At Flex Tax and Consulting Group, we specialize in assisting nonresident aliens with their U.S. real estate transactions, offering expert advice to navigate the complexities of these processes. We aim to ensure a smooth and compliant transaction, minimize potential tax liabilities, and avoid legal pitfalls.
For personalized assistance and more information on managing the sale of U.S. property, contact Flex Tax and Consulting Group. We’re here to help you every step in your real estate and tax compliance journey.
For more information, please get in touch with us at 415-860-6288 and [email protected].
To schedule a free 15-minute consultation with our specialists, please visit Book An Appointment – Flex Tax and Consulting Group (FTCG) (flextcg.com).
Reference:
https://www.irs.gov/individuals/international-taxpayers/itin-guidance-for-foreign-property-buyers-sellers
