The Tax Issue:
I am a Canadian resident about to sell my property in California. The escrow company will hold 10% of the sale price $300,000 until I complete a W-7 form. Is there another way of not having my taxes withheld or is this the route I must take to get back that $30k.
I bought the house for $255k and put $15k in it, therefore after sale expenses commissions and such I really only gained about $7k so should not have to owe $30k?
The 10 percent withholding tax, or as we tax geniuses call it, the Foreign Investment in Real Property Tax (“FIRPTA”) is an obligation of the buyer, when a non-resident alien (“NRA”) disposes of US real estate. If the buyer fails to withhold or remit, he or she may be liable for the tax. The FIRPTA withholding tax is not your actual tax liability but rather a mechanism to assist collection of tax from an NRA.
Amounts to be withheld under FIRPTA are based on the gross proceeds but can, however, be adjusted if you go through the procedure of seeking a withholding certificate from the IRS (Form 8288-B). If a certificate is issued, the withholding will be recalculated, and it will be based on your net gain, rather than on the gross proceeds.
Whether or not you go for the withholding certificate, you will be required to file a US income tax return (Form 1040NR) to report the gain on the sale, and either pay additional tax if the FIRPTA withholding did not sufficiently cover the US tax liability, or claim a refund if the FIRPTA withholding was in excess of the actual US tax liability.
The first step in either case is for you to obtain a US tax identification number and that’s where the W-7 comes in.
So after reading this, if it sounds like you should seek a US professional to help you out, then I’ve done my job!