Internal Revenue Code § 121 provides taxpayers with an income tax exclusion from the gain of taxpayer selling a primary residence. The exclusion amount for a single up to $250,000 and married couples will raise to $500,000. To qualify for the exclusion, the taxpayer-owned and used the property as the taxpayer’s principal residence for periods aggregating two years or more during the 5-year period ending on the date of the property sale or exchange. Determining the primary residence is a matter of fact and circumstances. For example, when a taxpayer rotates between two different residences, only one will be regarded as the primary residence based on a variety of factors, including but not limited to the time spent in the residence, workplace, and residence of other family members, etc. The address listed on the tax return, the address listed on the driver’s license, the mailing address for bills and letters, the location of the bank, and the religious organization’s location.
Non-resident foreigners can also apply this exclusion. However, because non-resident aliens are not eligible to submit a joint return, each person designated as a non-resident alien needs to share its share of the national resident exclusion tax in a separate tax return. In practice, this means that if the sale proceeds exceed $250,000, each filer will need to 1) be eligible to apply for the exemption of the primary residence on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return and state the ownership share of the principal residence.
According to the ” Foreign Investment in Real Property Tax Act ” (“FIRPTA”), non-resident foreigners should also pay additional tax other. For primary residences where the realized amount of sale (usually the sale price) is less than $300,000, no withholding is required; for sales between $300,000 and $1,000,000, the withholding tax rate is 10%; if the sales exceed $1,000,000, The withholding rate is 15%. Non-resident foreign taxpayers may find themselves eligible to claim the exclusion of the primary residence stipulated in IRC § 121, so FIRPTA withholding taxes will exceed his/her highest tax liability in the transaction. In this case, the taxpayer can request the US Internal Revenue Service to provide proof of withholding tax to the buyer, indicating that the withholding tax rate they owe is low or not at all. Since the primary residence exclusion in IRC § 121 does not constitute a non-recognition provision within the meaning of FIRPTA (non-recognition provision makes FIRPTA not applicable at all), unless the purchaser obtains a withholding certificate, the buyer must withhold the appropriate tax rate.
Tax treatment for gain from sale of principal residence can be tricky. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at [email protected].
