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Dear Tax Talk,
I am a Canadian who purchased a fix-and-flip home in Arizona. I have now sold the home for more than $300,000; thus, I have a foreign withholding tax of 10 percent of the purchase price. However, my entire profit is substantially less than the 10 percent being withheld so I am filing Form 8288-B. I find the form straightforward but in addition to the form, I need to file other documents and statements. Can you please outline what else I need to file with Form 8288-B?
Don’t be fooled; Form 8288-B is one of the more complex forms to get the IRS to accept and process. The form is simple, but the trick is in the attachments.
If a foreigner sells a U.S. real property interest, the buyer has an obligation to withhold 10 percent of the purchase price unless an exception applies. The typical exception is that it will be owner occupied and sold for $300,000 or less.
If the foreign seller knows the withholding will be excessive, he or she can apply for a reduced withholding certificate with Form 8288-B. The buyer still withholds, but instead of paying the amount to the IRS, they hang onto it — typically with an escrow agent — until the IRS accepts Form 8288-B. The certificate for reduced withholding is based on the maximum tax of the seller. The form is filed on or before closing, and it usually takes about 90 days for the IRS to respond.
The maximum tax the seller can have on the sale is composed of two parts:
1. Any unsatisfied withholding from when purchased (8288-B, question 8).
2. The tax from the sale (question 7b).
Proof for both components should be attached to the withholding certificate.
To establish there is no unsatisfied withholding from the purchase, you have to show either the purchase was exempted from withholding or that you withheld. Typically, if you didn’t withhold on the purchase, it is because somewhere in all your closing papers the seller signed a nonforeign affidavit. Attach that as proof.
The maximum tax should start with a columnar paper (i.e., in Excel) showing the purchase price from when you bought the property, which should be supported by your HUD-1 (a document lenders are required to provide that states the actual costs of the loan). Continue with invoices, receipts and contracts for improvements. Forget electricity, interest, taxes and insurance, as the IRS does not consider this basis. Your tax from the sale should be shown at 15 percent of the gain provided your holding period will be long term. Follow the instructions for this line for more attachments such as the contract for purchase.
At this point, you should be looking for an accountant to get this done. Good luck.
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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.