# Capital Gains tax for Non-US



## debbie790

Hi,

I am:

Not a USA citizen, nor ever held a green-card
Not a USA resident, resident of Dubai

I own a villa in USA, and have never rented out this villa (i.e. have never earned any income from this property) and never took out a mortgage, but have been paying property tax, insurance. I am now planning to sell this villa and would like to know:

a. Would I be subject to Capital Gains tax?

b. If Yes, how much?

c. How do I pay this capital gains tax, i.e. would the closing lawyer withhold the proceeds from the sale? OR I would receive full sale proceeds and then will be responsible to forward the tax to the IRS?

Thanks
Debbie


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## BBCWatcher

debbie790 said:


> a. Would I be subject to Capital Gains tax?


If you have a taxable capital gain per the IRS's definition, yes. Refer to IRS Publication 523 for worksheets to help you calculate the taxable capital gain (if any). The taxable capital gain is not usually the simple difference between the selling price and the original buying price. It's usually something less than that.



> b. If Yes, how much?


Assuming you have a taxable capital gain, the amount of tax would be determined via your IRS Form 1040NR filing. Note however that the estimated tax is owed soon after the calendar quarter when you dispose of the property. For example, a sale of property this quarter (fourth quarter, 2015) requires paying the estimated tax by January 15, 2016. If you don't pay sufficient estimated tax then some interest/penalty could apply.



> c. How do I pay this capital gains tax, i.e. would the closing lawyer withhold the proceeds from the sale? OR I would receive full sale proceeds and then will be responsible to forward the tax to the IRS?


You may be subject to 10% withholding on the total selling price. If there is withholding it will (with about 99.9999% confidence) not be the correct amount of tax. You would still be responsible for filing a 1040NR and paying (or getting a refund for) the difference. Withholding obviously does count toward the estimated tax payment requirement.


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## JustLurking

debbie790 said:


> a. Would I be subject to Capital Gains tax?


No, worse. You'll be subject to _ordinary US income tax_ on the gain thanks to FIRPTA:


> Foreign persons are taxed only on certain items of income, including effectively connected income and certain U.S. source income. Foreign persons, however, are not taxed on most capital gains. Internal Revenue Code section 897, as enacted by FIRPTA, treats the gain on a disposition of an interest in United States real property as effectively connected income subject to regular federal income tax.
> ...
> FIRPTA gain is subject to tax as effectively connected income. Nonresident alien individuals are subject to tax on such income at regular graduated tax rates for U.S. individuals. The deduction for personal exemptions, certain adjustments to gross income, and most itemized deductions are not allowed. Foreign corporations are subject to tax on such income at regular corporate income tax rates. The branch profits tax under Internal Revenue Code section 884 may apply, subject to the branch termination exception. The alternative minimum tax may also apply.


Too late now, but what you probably should have done is hold this US asset through an intermediate holding company.


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## iota2014

Wow. Fiendish.

What Is FIRPTA, and How Does It Affect My Commercial Real Estate Investment? | Phil Jemmett

Sympathies, OP.


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## BBCWatcher

JustLurking said:


> No, worse.


Not worse than short-term capital gains. Rather better due to allowed cost basis adjustments, actually.

By the way, Debbie790, you _might_ be able to reduce the 10% withholding if you file IRS Form 8288-B ahead of the sale.


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## BBCWatcher

iota2014 said:


> Sympathies, OP.


That's thoughtful, but I'm not sure why that's necessary. Tax is only owed on the net gain (if any), after adjusting the cost basis as allowed. Gains are good. If Debbie790 owes tax it'll be because the real estate gained value (above the adjusted cost basis), and Debbie790 realized that gain. Debbie790 will keep the bulk of her gain and has had enjoyment of her property as well.

If Debbie790 purchased the property before 1980 we might have a little sympathy since this particular tax policy changed in 1980. But that was over 35 years ago.


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## iota2014

Try putting yourself in the position of the seller. It's bound to be a disincentive, to purchasers, all this delay and bureaucracy. Which is likely to have an effect on the sale price.

OP, is the $300,000 threshold any good to you?


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## JustLurking

BBCWatcher said:


> Not worse than short-term capital gains. Rather better due to allowed cost basis adjustments, actually.


Ah yes, your normal _modus operandi_ when caught out. Find one odd niche case that almost certainly doesn't apply but which is worse than what the US actually does, and then compare to that.

I will bet dollars to doughnuts that the OP has owned this villa for more than a year.

Also, worth noting that even though it's reasonably well in the past, FIRPTA is a US _override_ of previously agreed tax treaties. I'll use the word 'renege' again here, because it applies.


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## BBCWatcher

JustLurking said:


> Find one odd niche case that almost certainly doesn't apply....


I recently (tax year 2014) paid U.S. short-term capital gains income tax, including Net Investment Income Tax. Interest and some dividends are also taxed at ordinary income tax rates. A janitor's salary is taxed at ordinary income tax rates. And so, as it happens, since 1980, is the net gain on the sale of U.S. real estate by a non-U.S. entity.

I never said Debbie970 wouldn't pay tax on the gains, and I didn't quantify her tax rate. I don't know what her tax rate will be (effective or marginal). The information I provided is completely accurate. But no, her tax rate is not going to be worse than the tax rate lots of people pay in a variety of situations. She'll probably do better than the tax rate _I just paid_ on _capital gains_, as it happens.


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## JustLurking

BBCWatcher said:


> But no, her tax rate is not going to be worse than the tax rate lots of people pay in a variety of situations. She'll probably do better than the tax rate _I just paid_ on _capital gains_, as it happens.


It is unlikely. US NRAs do not pay US _capital gains_ taxes at all. They do however pay US _income taxes_ on capital gains realized in real estate. And the reason they do so is because congress, by fiat and by legal fiction, converted some capital gains into income with FIRPTA.

The OP's tax rate on this is extremely likely to be worse than a similarly situated US citizen. Why? Well firstly, she gets to pay US income tax rates on a capital gain, and US income tax rates are either higher than (long term) or at best the same as (short term) capital gains rates. But a US citizen in the precise same situation and facing short term capital gains rates would be able to take the standard deduction, file MFJ, and otherwise employ several other tax mitigations that are simply not available to NRAs.

Like I said, then, worse than US capital gains tax. And goes back to a statement I made in another thread where I suggested that harsh US tax policy discourages direct investment in US assets. The right way to invest into the US is via trusts or other insulating holding companies. Without these an NRA simply walks into a US tax minefield unprotected.

Now, you might be of the opinion that even though this is all tilted away from the NRA and towards the US because the US reneged on previous treaty agreements, NRAs should nevertheless pay more, perhaps 100%, of their capital gains to the US. Fine, but we know where that road leads. What is also certain is that the OP will receive nothing at all back in benefits from the US tax paid on this gain.


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## Bevdeforges

Easy here, folks. Question was asked and answered. Whether you happen to consider the answer to be a "reasonable and fair" way to tax the income/gain is more or less irrelevant. And arguing over the morality of specific issues in US tax law and regulations really is getting boring for the rest of us.
Cheers,
Bev


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## BBCWatcher

I agree with Bev. The tax rate is the tax rate. There's no universal physical constant dictating whether that rate is "high" or "low," and there's certainly no obligation for a country's tax code to treat real estate purchases and sales by foreigners the same way it does purchases and sales by domestic entities. (In fact there are many good public policy reasons why a tax code should treat foreign v. domestic entities differently.)

For the record, similarly situated U.S. persons are subject to the Net Investment Income Tax whether the real estate is held long-term or short-term. Debbie790 is not -- Non-Resident Aliens are exempt from the NIIT. Debbie790's tax rate will be lower than the short-term capital gains tax rate for U.S. persons, inclusive of the NIIT.

For perspective, Singapore, to pick a random global example where I live, charges foreigners a 15% tax on the purchase of real estate based on the total purchase price. Its own citizens pay 0%, and permanent residents pay 5%. Moreover, foreigners require special approval to buy landed property, and that approval is by no means guaranteed. That's pretty tough. The tax is paid up front and calculated on the total purchase price, and if the property then falls in value by 20% you've still paid the tax. If the property appreciates by 17.65% (after costs) then you've paid the equivalent of a 100% capital gains tax if my math is correct. And that's not the only possible tax on this transaction.

The U.S. tax treatment (since 1980!) of foreign purchased and sold U.S. real estate is extremely tame in comparison to Singapore's, and Singapore is much tamer than many other countries. In fact many countries completely prohibit the purchase of real estate by foreigners.


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## BBCWatcher

I can describe the federal tax rates that would apply to the net gain from the sale of Debbie790's property. The marginal tax rates range from 10% to 39.6%. That is, the absolute worst possible U.S. federal tax outcome is a tax rate of 39.6% on the net gain. (That would likely occur if Debbie790 has over about $425,000 in other income in the year when she sells the property.)

So, let's suppose Debbie790 is selling a home for $500,000 that she bought for $300,000. Let's suppose she calculates that she spent $50,000 in allowable costs (IRS allowed renovations, for example), so her IRS gain is $150,000. Let's suppose she has $100,000 in other income in the year when she sells, and let's suppose that's 2015. That puts her in the 28% tax bracket (before counting the real estate gain), so she'll pay an effective tax rate of somewhere between 28% and 33% in this example -- roughly 30% would be my guess. So the federal income tax will be roughly $45,000 in this example. There is 10% withholding, so $50,000 of the sale price will be withheld. Debbie790 in this example would file a 1040NR tax return and receive a refund of about $5,000 from the IRS.

There may be state and/or local taxes, but without knowing where the property is located it's hard to characterize those and whether they would be paid by the buyer or seller or both. Some states (Florida, for example) don't have any state income tax, though a real estate transfer tax is possible even in such places.


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## JustLurking

BBCWatcher said:


> Debbie790's tax rate will be lower than the short-term capital gains tax rate for U.S. persons, inclusive of the NIIT.


But again, this is likely an apples-to-oranges comparison where the asset has been held for over a year. It might have been held for decades.

And most significantly of all, this US tax could have been _entirely_ avoided by buying the property through a holding company. Even a residential REIT gets better treatment.

The aim of continually pointing out these harsh taxes on NRAs, areas where the US fails to live up to treaties, and so on, is to try to ensure that when folk invest into the US in future they do so with their eyes wide open. The general belief that US taxes are straightforward, non-punitive and usually protected by treaty for NRAs is, unfortunately, a myth. Sadly a lot of folk don't realized that until the trap has already been sprung.


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## BBCWatcher

Who would purchase real estate in _any_ country without understanding various implications including tax implications at a basic level or better? Tax implications that haven't changed in structure in the U.S. since 1980, although the applicable tax rates are much lower than they were in 1980. Debbie790 obviously already has a basic understanding there could be tax implications when she sells her U.S. real estate, and she asked for particulars. Her questions are well answered.

I really don't understand why there's a need to express a political argument here and "hijack" this thread. Every country sets its own tax policies and rates, and most of them favor domestic entities over foreign entities when it comes to their real estate.

Yes, U.S. persons often (but not always) enjoy somewhat preferential tax rates when they sell U.S. real estate. This surprises exactly no one, I think.


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## JustLurking

BBCWatcher said:


> ... Let's suppose she has $100,000 in other income in the year when she sells ...


Having that much other _US source_ income is going to be unlikely. OP is neither a US person nor a US resident for tax purposes, so any non-US earnings won't come into her 1040NR.

Let me try this from the top and without editorializing, since there is now a fair bit of incorrect information upthread.

OP, you are a non-resident alien, abbreviated to NRA. _In general_ the US _does not_ levy capital gains taxes on US-situs assets held by NRAs.

However, in 1980 congress created FIRPTA to make an exception for real estate. The US now considers capital gains made by NRAs in _directly owned_(*) US real property assets to be 'effectively connected income', abbreviated to ECI. And the US _does_ levy its income tax on NRAs with ECI. This means you will have to pay US income tax on any realized gain in your villa's value.

(*) The easiest way to avoid direct ownership is to interpose one or more intermediate holding companies. This is much easier to arrange before than after purchase.​
How much you pay will depend, of course, on how much you gained while holding your villa. You may be able to take some deductions, but your choices are limited. NRAs cannot take the 'standard deduction' normally available to US taxpayers, and also, if married, cannot file jointly(**), something that usually benefits US taxpayers.

(**) There's an exception for a few folk, including Canadian residents. You're Canadian but not a resident of Canada, so that probably won't apply. You should however check out the angles.​
The key to finding out your US tax liability here is form 1040NR. You will pay graduated rates, but only on your US source income, which in this case is (presumably) just the villa's capital gains. Any non-US income does not factor into the 1040NR anywhere, and so should not affect your US tax rate on this gain.

As a resident of the UAE you probably do not have any local tax liability against which to offset your US tax here. If you have any Canadian liability (unlikely I suppose, but possible) you should be able to offset against that. You might also want to check the US/Canada tax treaty carefully for any favourable conditions on real estate. I suspect that it is unlikely you will find any, and tax treaties usually hinge on residence and you are not a Canadian resident, so even if you do find something it possibly will not apply. The US has no tax treaty with the UAE.

Finally, since you have not yet sold, maybe hold off until you know how best to handle it. FIRPTA will cause delays and hassle in the process of selling, and you will want to go into this with your eyes wide open.

If it were me, and if the capital gain is sizable, I would take some professional advice to see if there is a way to restructure your ownership of the villa _before_ selling. In particular, most reputable professionals recommend that NRAs only hold US real estate through an intermediate holding company (example here). This generates different hassles, usually around receiving rents (something you say you don't have) and the US 'branch profits tax', but can help avoid undesirable interactions later with FIRPTA and the associated tax on capital gains.


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## iota2014

OP, if still listening, you might want to have a look at this:

https://www.govtrack.us/congress/bills/114/s915/summary

If it goes through, it might increase the rate of withholding from 10% to 15%, apparently. Which will be even more offputting to any potential buyers. Unless you can sell it to a pension fund!

If it was me I would ring up a few well-chosen U.S. real estate agents and get some free advice.


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## BBCWatcher

JustLurking said:


> Having that much other _US source_ income is going to be unlikely. OP is neither a US person nor a US resident for tax purposes, so any non-US earnings won't come into her 1040NR.


I agree with this clarification. I should have put U.S. income in front of that figure. Also note there's a trip through the AMT.

IRS Form 8288-B appears to require a worldwide income calculation to determine whether there will be any relief from withholding.



> As a resident of the UAE you probably do not have any local tax liability against which to offset your US tax here. If you have any Canadian liability (unlikely I suppose, but possible) you should be able to offset against that.


There's going to be no U.S. Foreign Tax Credit allowed here. It's a U.S. gain, not a foreign one. I think Debbie can safely skip this part.



> FIRPTA will cause delays and hassle in the process of selling, and you will want to go into this with your eyes wide open.


I don't think this is a big deal. The withholding is handled as part of the closing. Sure, make sure the attorney (usually) handling the closing knows about it, but this isn't particularly uncommon. Debbie just doesn't see 10% of the selling price, that's all.

The link you referred to doesn't actually recommend a foreign owned U.S. subsidiary, and it doesn't offer any optimism that's even possible post-purchase. It's also yields a 35% top tax rate anyway (i.e. not exciting). The main (or only) reason that approach is taken is for estate tax reasons. The "best" option listed in that document is a "foreign irrevocable trust" to try to get a 20% top tax rate but also not self-evidently possible when the property is already personally owned.

Sure, it's reasonable to research that trust option, but I'm not optimistic.


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## JustLurking

BBCWatcher said:


> IRS Form 8288-B appears to require a worldwide income calculation to determine whether there will be any relief from withholding.


Where did you find this? Looking through both form and instructions, I could not find any reference to 'worldwide income', and only a handful of references to 'income' in general, none of which seem to apply here.



BBCWatcher said:


> There's going to be no U.S. Foreign Tax Credit allowed here. It's a U.S. gain, not a foreign one. I think Debbie can safely skip this part.


I think you misread my statement. I'm suggesting a credit _for_ US tax paid, to be taken _against_ any other (Canadian, UAE) tax on disposition.

Because of circumstances here there probably is no non-US tax -- the UAE has no tax, and Canada only taxes residents and would not normally tax its non-resident citizens. But it is still worth checking.



BBCWatcher said:


> The link you referred to doesn't actually recommend a foreign owned U.S. subsidiary...


But it does spell out well the various disadvantages of not doing so.



BBCWatcher said:


> Sure, it's reasonable to research that trust option, but I'm not optimistic.


Neither am I. But it seems less than diligent not to at least check out the options. Some sources suggest it may be possible, albeit probably expensive at this stage in ownership.


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