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A nonresident's house sale and capital gains taxes

George SaenzDear Tax Talk,
I understand that nonresidents (or foreigners) who want to sell a house are subject to some tax withholding. I also understand that with U.S. citizens, if certain conditions are met, the first $500,000 of capital gains is exempt from federal capital gains taxes.

My question is: If I am a U.S. resident (i.e., a green card holder, but not quite a citizen yet), am I subject to withholding -- just like foreigners -- or will my case be treated as if I am an American citizen (and thus enjoy the capital gains tax exemption)?

I am filing a 1040 every year as a U.S. resident.

Thanks for your help.
-- ZT

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Dear ZT,
Immigration and tax laws differ on their definition of "resident." A person is a resident for income tax purposes if he has a green card or resides substantially in the United States, regardless of his immigration status. An individual can be here illegally and will be considered a resident for income tax purposes and an illegal alien for immigration purposes. If you're a resident with respect to income tax, you are treated the same as a citizen for income tax purposes with the same responsibilities, obligations and advantages as a citizen.

An individual is a nonresident alien for income tax purposes if he does not have a green card and does not reside in the Unites States substantially. A nonresident alien is subject to different rules on the sale of a residence in the United States. Since a nonresident alien, by definition, does not reside in the United States, his principal residence cannot be in the United States. Accordingly, he cannot claim an exclusion of $500,000 on the sale of a principal residence.

The purchaser of a property that is owned by a nonresident alien has a withholding obligation on the purchase. Technically, all sellers of real property have to provide an affidavit that they are not nonresident aliens for income tax purposes or they are subject to withholding. An exception exists for a buyer of a property that is $300,000 or less and will be occupied by the buyer as a principal residence.

Accordingly, since you are a resident for income tax purposes, you are not subject to withholding and can claim the $500,000 exclusion, provided you are otherwise entitled to the exclusion (in other words, you meet the two-year ownership and use tests, you are married, and you file a joint return).

-- Posted: May 19, 2005





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