Selling U.S. real estate as a foreign owner brings special tax rules. Nonresident aliens face FIRPTA withholding, a U.S. tax return and, in most cases, the need for an ITIN. This guide explains each step so you can plan ahead.
What is an ITIN and why do nonresident aliens need one?
An Individual Taxpayer Identification Number (ITIN) is a tax ID the IRS issues to people who need a U.S. taxpayer number but can’t get a Social Security number. When you sell U.S. property as a nonresident alien, you need a taxpayer number to file your return and to claim credit for tax withheld at closing.
How FIRPTA withholding works
Under the Foreign Investment in Real Property Tax Act (FIRPTA), the buyer generally must withhold 15% of the amount realized when a foreign person sells U.S. real estate. The amount realized is usually the sale price. Some sales of homes to buyers who will live in them qualify for a lower rate or no withholding.
The buyer sends the withholding to the IRS with Forms 8288 and 8288-A, generally within 20 days after closing. Then the IRS credits it against your U.S. tax. However, you need an ITIN to get that credit or a refund.
Applying for an ITIN
If you don’t have an ITIN, apply on Form W-7. You can usually attach it to your tax return. Alternatively, if you apply for a FIRPTA withholding certificate, you can submit Form W-7 with that application. Working with an IRS Certifying Acceptance Agent can make the process easier. See our ITIN application service for details.
Reducing FIRPTA withholding
FIRPTA withholding is based on the sale price, not your gain. So it often exceeds the tax you actually owe. To reduce it, you can apply to the IRS for a withholding certificate on Form 8288-B.
Ideally, file the application before closing. If an application is pending at closing, the buyer still withholds but can generally hold the funds until the IRS acts. The IRS usually takes about 90 days or longer to respond, so start early.
Taxes on the sale
Federal capital gains tax
Nonresident aliens owe U.S. tax on gain from selling U.S. real estate. Your gain is the sale price minus your adjusted basis and selling costs. If you held the property more than a year, long-term capital gain rates generally apply. In addition, depreciation you took on a rental may be taxed at up to 25%.
State taxes
Many states also tax the gain, and some require their own withholding. For example, California generally requires withholding on sales by nonresidents. So check your state’s rules before closing.
Reporting the sale
- Form 1040-NR: You report the sale and claim the FIRPTA withholding as a credit.
- Form 8288-A: The IRS stamped copy shows the tax withheld. Attach it to your return.
For more detail, see the IRS page on FIRPTA withholding.
Get help selling U.S. property as a nonresident
We help nonresident aliens with ITINs, withholding certificates and Form 1040-NR. To plan your sale, call (415) 842-2940 or book a free 15-minute call.