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Dear Tax Talk,
I am in the process of buying my father's house in California; however, because he is a foreigner, I am responsible
for holding 10 percent of the sale price for IRS tax purposes. However, due to the recent real estate market, he
is actually losing money from the sale (selling price is less than his purchase price). What should I do to figure
out the proper amount of withholding? And since he doesn't file tax return here, if there is any tax withholding,
how can he get it back?
-- Eric
Dear Eric,
While your dad may have given you everything in this world, the IRS doesn't care. It wants you to take away his
money to pay taxes. Under the general rule, if you buy a primary home for $300,000 or less, you do not have to
worry about withholding taxes from the seller.
If the property won't be your primary home or its price is greater than $300,000 you have to worry
about withholding if the seller is not a U.S. person. In most transactions, the seller signs a non-foreign affidavit
among myriad other papers, and withholding is avoided.
If the seller can't truthfully provide the affidavit, then the title company or other party handling
the closing (the closing agent) will withhold 10 percent of the selling price as an estimate of what the foreign
person may owe in income tax on the sale.
Income tax is actually owed on the gain on the sale; the selling price is not the gain. Gain is the
difference between the selling price and the property's cost, plus improvements and expenses of the sale.
Because nobody likes giving the IRS money, especially when they don't owe it, the seller can apply for
an adjustment to the withholding. You as the buyer cannot adjust the withholding. An application for reduced or no
withholding is made on Form 8288-B.
The application should be filed on or before the closing date of the sale. It takes the IRS about 90
days to process the application. Because the IRS will not process the application until after the closing, the closing
agent is required to withhold the 10 percent, but does not have to turn it over to the IRS until the application is
processed.
The closing agent will keep the 10 percent in their escrow account and once the IRS replies, they can
disburse the funds directly to the seller thus avoiding further delays in seeking a refund from IRS.
If the foreign person does not have U.S. tax identification number, he or she will need to apply at
the same time as submitting Form 8288-B. The foreign person is required to later file an income tax return with respect
to the sale. (For example, if the sale takes place in 2008, your father would file a Form 1040NR on or before the due
date in 2009 to report the sale.) Because the application procedure is technical and cumbersome, expect to pay an
accountant or attorney a separate fee.
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