Home sales tax for foreigners

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Dear Tax Talk,
My parents just sold a U.S. property. My father is a foreigner but my mother is a U.S. citizen. They filed a FIRPTA (Foreign Investment in Real Property Tax Act income tax withholding) stating exactly that. Although the sale price of the property is more than $300,000, the closing agent didn’t withhold the 10-percent tax. They don’t want to file a joint U.S. tax return, as if they do, my father’s income will be subjected to U.S. taxation. How should they file their tax regarding this property sale?
— Zoe

Dear Zoe,
In tax language, we refer to this as a mixed marriage. The general rule is that when a person goes to sell real property located in the United States, that person needs to furnish an affidavit stating that he or she is not foreign. If they cannot sign this affidavit and the property sells for more than $300,000 or is not intended to be used as a residence by the buyer, withholding of 10 percent of the selling price is required. 

If the closing agent fails to withhold the appropriate tax, the foreign seller is supposed to file and pay the required tax. The withholding agent and the buyer can be held liable if the foreign person does not comply. 

Generally, in a mixed marriage, the couple cannot file a joint return. The couple can elect to file a joint return in certain circumstances and if the foreign person agrees to be subject to U.S. income tax on his worldwide income. 

Your father apparently has significant income from outside the U.S. and does not want to subject himself to taxation in the U.S. Assuming your father is willing to otherwise fulfill his obligation, he should file Form 1040NR to report his half of the sale and compute the appropriate tax. His tax would be approximately 15 percent of the gain on his half of the sale of the property.

Your mother would file Form 1040 if the sale of the property is otherwise taxable. Generally, the only reason the sale would not be taxable is if it was your mother’s principal residence. This means that she owned the home and lived there for two of the last five years as her primary residence. Your father cannot use this exclusion, as, by virtue of his foreign status, he cannot have a primary residence in the U.S.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.