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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.
Olga
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.
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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