When Foreigners Sell
One of the nice things about selling real estate in New York is that even those who have never had to file a tax return before get to file one. What could be better than that! Like everything else in our market, the rules are complicated. Let’s simplify it.
New York State: Individuals (and trusts and estates) who sell real estate in New York State (and this includes a coop) must pay at closing the tax on the estimated gain as a condition of the sale, unless they are exempt from making the payment at closing. And most transactions are exempt. Please note, however, that the exemption is with respect to the timing of the payment, and not the obligation to make the payment. Selling real estate in New York is a taxable event, and everyone must account to the taxing authority with respect to gains. The only difference between exempt and non-exempt individuals is the timing of the payment.
So, who is exempt from paying at closing? Here are the categories, any one of these allows an exemption:
• The seller at the time of the closing was a resident of New York State
• The property being sold was the principal residence of the seller for 2 of the last 5 years
An example might help. Bob owns a condominium in New York City that he has used for years as a second home. It has never been his principal residence. He is at the time of the sale a resident of New Jersey. Bob must fill out the applicable tax for and remit the tax payment on the estimated gain from the sale, or he cannot close.
United States: Individuals who sell real estate in the United States must also typically certify at closing if they are exempt from the federal withholding requirement on real estate, unless the price is $300,000 or less and the property is acquired for primary residence. If not, then the seller must certify that they are exempt from withholding. Two classes are generally exempt: (1) citizens, and (2) resident aliens. Others are “foreign persons” under the statute and must withhold 10% of the purchase price unless they have obtained a withholding certificate from the IRS approving a smaller withholding. These certificates, however, can take at least 90 days to obtain, so be sure that counsel starts this process early to ensure that the closing runs smoothly.
Let’s do an example. Naomi is a Canadian national who has owned an investment property in Brooklyn for several years. She does not have any immigration status in the U.S. She sells the property for $1,000,000. At closing, the purchaser of this property must withholding from the purchase price $100,000 and remit the same to the US Treasury. Naomi would then file a US tax return for the year in which the property was sold, regardless of whether she has any other income in the US.
When the seller files the tax return, is any part of the FIRPTA tax returned, or is it an across the board 10% tax for any foreign seller who sold an investment condo? I’ve had sellers refuse to sell and take their condos off the market once they found out about the 10% tax. (They do not file taxes in the US nor do they earn income here)
What happens when the investor has an opportunity to re invest, does he have to pay taxes first?