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.
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.
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