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Tax Talk with George Saenz

Ask the tax adviser

Tax withholding on a house sale

Dear Tax Talk:
I own a house with my parents. They are foreigners but have Social Security numbers. We are planning to sell the house. Are we subjected to the 10-percent withholding at the closing? Thanks.

Dear JC:
When a foreign person sells real property in the United States, that person is subject to income tax withholding to prevent the evasion of taxes. The buyer, usually through his closing agent, is responsible for withholding the tax at closing.

Withholding usually applies to the sale unless the seller can provide an affidavit stating that he is not a foreign person or some other exception applies. Your parents will not be able to provide the affidavit, so you have to look for another exception to avoid withholding.

The most common other exception is that the sale is for less than $300,000 and the buyer will use it as his principal residence. If this is the case, the buyer has no obligation to withhold taxes at closing.

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If this exception does not apply, then the buyer is required to withhold 10 percent of the selling price. Since your tax may not be 10 percent of the selling price (the tax is based on your gain, which obviously differs from the selling price on which the withholding is based), you can apply for reduced withholding.

Reduced withholding is requested prior to closing to avoid paying excess taxes on the sale.

Filing an application for reduced withholding (Form 8288-B) and properly documenting the application is rather complex. I recommend you have an accountant familiar with the application apply for the reduced withholding certificate.

-- Posted: April 30, 2002

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See Also
Handling an inheritance from foreigners
Dealing with a complex foreign estate

Reporting a property sale by a non-U.S. citizen

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