Japanese non-resident aliens who are selling property in the United States should be aware of the rules and responsibilities of the Foreign Investment and Real Property Tax Act (otherwise known as FIRPTA), which governs the rules regarding sales of real property in the United States. First, it is important to make the distinction on whether or not you qualify for a non-resident alien status. Under the Internal Revenue Code, if you meet either of the tests for residency, then FIRPTA is not applicable to you and you will have different US tax requirements. However, if you are truly a non-resident alien, then FIRPTA will impose several requirements regarding required with holdings on sales of property, taxes owed to the IRS, and filing requirements in both the United States an Japan. This provides an overview of those requirements.
FIRPTAs principal requirement is that when a non-resident alien sells real property within the United States, then 10% of the proceeds of that sale must be withheld at closing by the buyer of the property and submitted to the IRS as a down payment.This represents the seller’s tax obligations on the sale. Although the obligation is on the buyer to collect and remit the tax, the seller can be placed in a difficult position with the IRS if the with holdings are not collected paid. This 10% withholding is equal to the purchase price of the sale, along with 10% of the fair market value of any other personal property transferred in the sale, less any 10% of any liability that is assumed by the property owner.
There are a few exceptions to this withholding requirement. For example, if the property is a residential property, the buyer acquires the property as their primary residence, and the purchase price is less than $300,000, then no withholding is required. Additionally, if the seller does not receive any money in the transaction (such as in a short sale situation) or if the seller provides notice to the buyer that there is no recognition of gain or loss is required, then withholding is not needed. There are a few other situations where withholding is not required and we would suggest that you consult with someone at Capital Tax and Accounting Services, Ltd. (http://www.capitaltaxltd.com) for further information. Also, a full listing of the exemptions is available on the IRS’s website at (http://www.irs.gov/Individuals/International-Taxpayers/Exceptions-from-FIRPTA-Withholding)
Along with the withholding requirement, there are a number of forms that need to be filed with the IRS to accompany the transfer of real property. The IRS requires an IRS Form 8288 (http://www.irs.gov/pub/irs-pdf/f8288.pdf) within twenty days of the sale date. IRS Form 8828A (http://www.irs.gov/pub/irs-pdf/f8288a.pdf), which is the statement of withholdings for foreign persons is also required and must be attached to the IRS Form 8288. Even though the responsibility to file the form may be delegated to the buyer, it is strongly recommended that the seller take the responsibility to make the required disclosures to the IRS. The IRS imposes stiff penalties, which may be up to $10,000, and interest charges for delinquent IRS Form 8288 filing.
If the seller feels that the taxes owed on the sale will be l ess than the required 10% withholding requirement, the seller may petition the IRS for a reduction of the withholding amount by acquiring a withholding certificate from the IRS. This certificate can be obtained by filing a IRS Form 8288B (http://www.irs.gov/pub/irs-pdf/f8288b.pdf) either on or before the date of the transfer of the property. Having a pending request for a withholding certificate can delay the need to file IRS Form 8288 and 8288A. However, the buyer is still responsible for withholding the proper amount of tax from the purchase price until the withholding certificate is approved.
Also, this amount withheld must be filed and paid with the accompanying 8288 and 8288A within 20 days after receiving the withholding certificate. If the withholding certificate request is denied, then the buyer is responsible for remitting the full 10% tax within 20 days. Although IRS Form 8288B may be technically filed all the way up until the date of sale, it is strongly encouraged that seller’s be proactive about obtaining a withholding certificate in order to speed up their transaction, especially if escrow is involved.
Finally, the non-resident taxpayer will have annual filing requirements both in the United States and Japan. In the United States, dispositions of property must be reported on the IRS Form 1040NR (US Nonresident Alien Income Tax Return) as well as any accompanying schedules or forms associated with the return. In Japan, residents will have individual income tax obligations at the national level, at the prefecture level, and possibly at the municipal level. All income associated with foreign property sales is considered taxable in Japan. Depending on the individual situation of the taxpayer, deductions or foreign tax credits may also be available.
For more information on this and other topics, we encourage you speak with the qualified tax professionals at Capital Tax and Accounting Services Ltd. Our qualified tax professionals can examine your individual income tax situation and maximize the benefits owed to you by minimizing your tax owed under both US and Japanese tax laws. For more information, please visit our website at: http://www.capitaltaxltd.com/