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Tax Talk with George Saenz

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Property sale capital gains by non-U.S. citizens

Dear Tax Talk:
I have power of attorney for my sister-in-law who lives in Italy and her brother who lives in Brazil. They inherited a house in Fairview, N.J., that was transferred to them in 1999 after the death of their sister (The deed is in their names; all estate taxes have been paid). Now they have sold the house.

I understand that an income tax has to be filed to reflect the gain, and taxes have to be paid before my sister-in-law can collect the money held in escrow by the lawyer of the buyers. Can you tell me what forms have to be filed and where to find help so I can collect the escrow money?
Thank you.

Dear Olga:
While your sister-in-law and her brother are off in exotic locations, you're stuck in New Jersey with a lot of work to do on their taxes.

I'm assuming your sister-in-law and her brother, who I will refer to as the sellers, are not citizens or residents of the United States, and that is why the buyer's attorney withheld funds in escrow for federal income tax.

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A foreigner who sells a U.S. real property interest is generally subject to income tax withholding of 10 percent on the selling price of the property. This money is retained by the withholding agent (in your case the buyer's attorney) at closing and remitted to the Internal Revenue Service together with Form 8288-A.

The IRS processes this form and tax payment and will return a copy of the form to the seller(s). This form, which is similar to a Form W-2 wage statement, is used by the seller to report the gain, if any, on the sale of the property.

A foreigner who sells a U.S. real property interest is required to complete an income tax return. In your case, you have two sellers who are individuals, so you're required to complete two tax returns using Form 1040NR. Each tax return would report one-half of the sale, since they are joint owners.

Since the property was inherited and estate tax paid, you should claim as the cost of the property the value for estate tax purposes, which should be the fair market value of the property at the time of death. Since it sounds like the sale occurred shortly thereafter, there probably should be little or no gain after deducting selling expenses, so the sellers can get back most of the tax.

The sellers will need to sign their own tax returns because the IRS generally does not recognize a power of attorney in connection with income tax return declarations. Since you've done all this work, maybe they'll invite you to Italy and Brazil to personally deliver the tax returns for signature.

-- Posted: Jan. 23, 2002

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See Also
Inheritance from a non-U.S. citizen
Taxes on an inheritance

Capital gains on an inherited house

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