Watch: Selling US Property from India: FIRPTA 8288-B and 1040-NR Guide
Guide for NRIs selling US property while living in India, covering FIRPTA withholding, Form 8288, Form 8288-A, Form 8288-B, the 20th day after disposition deadline, 1040-NR refunds, ITIN planning, capital gains exemption, and India tax reporting.
The full write-up, with the numbers and the links.
Chapters
- 0:00 Introduction
- 2:30 Key Challenges
- 4:42 FIPTA Tax Withholding
- 6:22 Tax implications
- 8:30 Step by Step guide
Transcript
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0:00 Hi everyone, welcome back to the Desi Return. Today, we are going to dive into a real-life scenario many NRIs are facing. You have moved to India or planning to move back to India, but couldn't sell your primary home because the market is down due to high interest rate or soft buyer demand. So, you have decided to rent it for now, but still plan to sell the house after while living in India. So, what does it involve? Taxes, FIRPTA holding, logistics headaches, and paperwork. But with the right approach, it is manageable. So, let's break it down step by step.
0:50 So, let's say you bought a home, maybe a town home or a single-family house. It was your primary residence in US while you're working in the US. You have now moved to India and you would be a non-resident from a tax perspective in US. You can determine your tax residency based on the substantial presence test and we will have a link in the description below. Let's say when you're moving due to high mortgage rates or low demand or emotional attachment, you have decided not to sell when you left US. Now you're renting the property, but you long-term plan is to sell the house.
1:36 So, here are the challenges that you would have when selling the house while living in India. First, you're not physically in US. Second, you might not qualify for primary home capital gain exemption anymore because you become a non-resident. But if you are a US citizen or a green card holder and still in the R&R or like you know, you can still be a tax resident from a US perspective. Third, you face US tax implications and Indian reporting issues. Fourth, you you may be subject to FIRPTA tax withholding. FIRPTA is Foreign Investment in Real Property Tax Act.
2:31 So now let's talk through these key challenges that you would face when selling the home in US while living in India. Physical absence. Since you are no longer physically in US, it would be hard to coordinate some of the logistics like repairs, staging the house, open houses, etc. And you need a trusted real estate agent and also a power of attorney for executing the sale transaction. Second, your tax residency status would have changed. You might become a non-resident from a US tax perspective.
Read the full transcript (10 more sections)
3:17 Then IRS sees you as a foreign person withholding a real property and that could trigger FIRPTA tax withholding. With FIRPTA tax withholding, the buyer has to withheld 15% of the sale price at the time of the closing. Even if you are selling it at loss, the withholding is 15% of the sale price. Keep in mind, you can get the money back by filing the taxes in US, but the tax withholding is 15% of the sale price. Next, you lose 250,000 for single, 500,000 for married filing jointly capital gain tax exemption if you haven't lived in the house two out of last 5 years. So, this is a significant important point because you know, that
4:17 Would be a big savings that you have to pay taxes. Last, US taxes the sale. India might also tax your global capital gains based on your residency and even though DTAA still applies.
4:42 Now, let's dive into FIRPTA tax withholding. If you are a non-resident alien from a US tax perspective, the buyer is legally required to withhold 15% of gross sales price and send it to IRS. Let's take an example. You sold your house for 500,000. So, the buyer withholds 75,000 from the closing and they would send that amount to IRS. Even if you gain is only $20,000 or even zero or even you lose money, there is still a withholding of 15%. That is huge. There are few exceptions. First, 0% withholding if the price of the house is less than $300,000 and the buyer is using it for primary residence. So, that's a first exemption.
5:42 10% withholding for sales between 300,000 to 1 million dollars if the buyer is using it as a primary residence. But, there is a good news. You can apply for withholding certificate IRS, and the form is called 8288-B to reduce or eliminate the withholding. So, it takes time. So, you need to plan ahead. So, please work with your US real estate attorney to ensure the compliance and apply for the form if required so that you can minimize the tax withholding with FIRPTA.
6:26 Now, let's talk about the tax implications of the sale in US and in India. In US, if the property is held for more than 1 year, it falls under the long-term capital gains, which is taxed at 15 to 20%. If it is less than 1 year, it is a short-term capital gain, and it will be taxed on ordinary income. As we discussed before, if you have lived in the house two out of last 5 years, you could become exempt from the capital gains because of the primary home. So, you'll be exempt on 250k for a single filer and 500k for married filed jointly. So, keep that in mind. Next, if your FIRPTA tax withholding is greater than your actual taxes, you will get that money back when you file your taxes using 1040NR.
7:21 Implications in India. Once you become a tax resident from an India perspective, the old wide income is taxed. You have to report the gain in ITR2 or ITR3. Keep in mind, DTAA still applies. If you have paid taxes in US, you can claim credit for that, and you don't have to pay the taxes in India. If you are in R N O R period, you may need to report the sale, but you don't have to pay the capital gains of the sale to India. Always consult with a CA. In an ideal scenario, you have lived in the house two out of last 5 years, and you're still in R N O R phase, so you would be exempt on the capital gains because of the primary home capital gain tax exemption, and since you're still in R N O R, you don't have to pay capital gains in India.
8:17 Based on your situation, work out what tax implications that you have in India and in US. Here is the road map to sell your house from India.
8:30 Hire an experienced realtor and property manager. Choose a realtor who has experience in your local market and who has worked with international sellers. Also, work with property manager to coordinate with tenants, repairs, staging, and showings. sign a power of attorney. If you can't travel to US, sign a power of attorney, preferably notarized, giving someone the authority to sign on your behalf. Third, check your lease terms and notify the tenants so that you can get the repairs done, stage the home, and have it ready for showings.
9:17 Next, list your home and be accessible so that you can respond quickly for any offers, for tours, and work closely with your realtor. FIRPTA tax holding. As we discussed before, plan ahead, file 8288-B if you want to minimize or reduce the withholding from the FIRPTA tax perspective. So, after the sale transaction, file form 1040-NR with the capital gains info and any required information to get the credit from the withhold. And last, remit the funds to India, but maintain the records. For example, the closing documents 1099-S to justify the source of funds when you're remitting it back to India.
10:14 So, if you're planning to sell your US property from India, start planning early. Talk to your realtor, CA, and CPA well ahead. Use a power of attorney, plan for FIRPTA, and prepare to file taxes in both countries if needed. If this video helped you, please like, share, and subscribe. So, if you have any questions related to FIRPTA or your personal situation, drop them in the comments below. Until next time, take care.
