In view of the consideration to sell your property we would like to explain the different U.S. income tax implications for a nonresident alien who sells U.S. real property.

Rental income and expenses resulting from the operation of the property will be reported on your U.S. income tax return as usual until you cease your rental business. When you sell the property, the resulting gain or loss on the sale is the difference between the sales price and the adjusted basis (adjusted basis is the original cost less the accumulated depreciation) of the assets you sell. If the sales price is greater than the adjusted basis of the assets, then a gain will result. However, if the sales price is less than the adjusted basis of the assets, then you will have a loss. A gain on the sale of U.S. property is subject to tax, however generally it is our experience that net gain is unlikely once that net operating loss carry forwards are considered.

In addition to the tax implication discussed above there is one possible complication. Internal Revenue Code Section 1445 imposes a 10% withholding tax on the sale of U.S. real property by a U.S. nonresident alien. The tax applies to the amount realized on the sale, which includes cash paid, and debt assumed in the sale. The buyer or transfer agent may insist on withholding this tax. An exception to this requirement is when a nonresident alien sells the property to a person who either (1) is planning on living in the property and using it as his/her principal residence for at least two years following the sale of the sales price of the property is less than $300,000 or (2) signs non-foreign affidavit which specifies that he/she is a U.S. resident. While the tax would most likely be completely refunded there is often a long delay to receive it.

You may summit an application for a withholding certificate or an application for early refund to the Internal Revenue Service (I.R.S.) to reduce or eliminate the 10% withholding tax on the sale. In both cases, the basis of the application is that the actual tax liability is less than the amount withheld. An application for a withholding certificate is generally prepared prior to the sale closing. The closing agent will withhold the 10% and retain it in an escrow account until the I.R.S. responds to the application, usually within 90-120 days. Upon receipt of I.R.S. approval of the application, the appropriate amount of tax due (if any) will be paid over to the I.R.S. and the balance of the amount withheld will be returned to you. Thus a withholding certificate filed before a transfer notifies the closing agent that a reduced or zero withholding amount is required.

An application for early refund is similar to an application for withholding certificate except that is submitted after closing and remittance of the withholding tax to the I.R.S. If this application is approved, the amount of withholding tax is refunded to you usually 120-150 days.

We hope this information will be helpful to you. We have prepared several applications for withholding certificate and application for early refund for our clients and we will be happy to assist you in any way possible. We do require a prepayment of $ 450.00 before preparing the withholding certificate along with a copy of the sales contract or this amount may be included in as a closing cost when you sell the property.

Please do not hesitate to contact us if you would like us to prepare any of these filings or if you have any additional questions.