Selling a home in the U.S. as a nonresident alien raises two big questions. First, can you use the Section 121 home sale exclusion? Second, how does FIRPTA withholding apply? This guide answers both.
What is the Section 121 exclusion?
Internal Revenue Code Section 121 lets you exclude gain from selling your main home. A single filer can exclude up to $250,000. Married couples filing jointly can exclude up to $500,000.
To qualify, you must have owned the home and lived in it as your main home for at least two of the five years before the sale. For more detail, see IRS Publication 523, Selling Your Home.
Which home is your principal residence?
Whether a home is your principal residence depends on the facts. For example, if you split time between two homes, only one counts as your main home. The IRS looks at where you spend more time, where you work and where your family lives. It also considers the address on your tax return and driver’s license, where you get mail and where you bank.
Can nonresident aliens use the Section 121 exclusion?
Yes. Nonresident aliens can claim the Section 121 exclusion if they meet the ownership and use tests.
However, nonresident aliens generally can’t file joint returns. So each spouse files a separate Form 1040-NR and reports their own share of the sale. In practice, each spouse must qualify for the exclusion on their own. Also, each spouse can exclude up to $250,000 of their share of the gain, rather than a combined $500,000.
How FIRPTA withholding works on a home sale
Under the Foreign Investment in Real Property Tax Act (FIRPTA), the buyer generally must withhold tax when a foreign person sells U.S. real estate. The standard rate is 15% of the amount realized, which is usually the sale price.
There is a reduced rate in some cases. If the buyer is an individual who plans to live in the home, and the price is $1 million or less, the rate is 10%. Moreover, if the price is $300,000 or less and the buyer plans to live there, no withholding is required. Note that these exceptions depend on the buyer’s plans, not the seller’s.
Reducing FIRPTA withholding with a certificate
FIRPTA withholding is based on the sale price, not the gain. As a result, it can far exceed the tax you actually owe, especially if the Section 121 exclusion applies.
The Section 121 exclusion is not a “nonrecognition provision” under FIRPTA. So it doesn’t automatically stop withholding. Instead, you can apply to the IRS for a withholding certificate on Form 8288-B. If the IRS approves it, the buyer can withhold less or nothing. Otherwise, the buyer must withhold the full required amount. You can then claim a refund of any excess on your tax return.
Get help with the Section 121 exclusion
Home sales by nonresidents involve both the Section 121 exclusion and FIRPTA timing. Planning before closing can save money and months of waiting. To discuss your sale, call (415) 842-2940 or book a free 15-minute call.