Non-U.S. sellers of U.S. real estate are subject to a mandatory 15% withholding tax at the time of sale, primarily serving as a security measure to ensure the IRS collects due taxes from international transactions. This withholding often significantly surpasses the seller’s actual tax liability. For instance, a foreign seller profiting $200,000 from a property sale would typically owe $30,000 in capital gains tax, but the initial withholding amounts to $180,000 based on the sale price of $1,200,000.
Consider this real-life example from 2020: A couple from abroad sold their house and nearly missed out on a $280,000 tax refund due to a procedural oversight. The escrow company mistakenly issued a single withholding tax check for $280,000, whereas submitting two separate checks would have streamlined the tax return filing process. Furthermore, the couple’s failure to include their Individual Taxpayer Identification Number (ITIN) and to mail the necessary checks and tax forms led to delays in processing their refund.
On June 9, 2021, our accounting team engaged directly with the IRS. Through discussions and the submission of the necessary documents, the IRS finally verified the tax withholding and processed their refund in 2022. The couple received individual refunds of $144,406.98 each, deposited into their bank accounts by January 3, 2023.
Refund Options:
- Standard Process: File a U.S. tax return in the year following the sale and adhere to specific steps to secure a refund, typically issued about 18 months after the sale.
- 8288-B Accelerated Refund: Filing IRS Form 8288-B with the aid of tax professionals can validate the actual tax liability and expedite the refund, potentially reducing the wait to just four months.
Challenges: Many non-U.S. sellers struggle with the complex steps necessary for a successful refund claim. Though sellers have up to four years post-sale to claim refunds, obtaining professional assistance can significantly improve their chances of success.
Ultimately, while this system effectively secures tax payments, retrieving overpaid funds can be intricate and generally necessitates expert guidance.
Need help reclaiming your withholding tax? Contact our experts today to ensure your refund is processed quickly and accurately! Call us at 415-860-6288 and email us at [email protected].
Reference:
https://www.irs.gov/forms-pubs/about-form-8288-b
