What taxes are there on the sale of real estate in the United States? In addition, we explain the points to be aware of when selling your home when you return to Japan.
Withholding tax when non-residents sell real estate in the United States
When a foreigner or foreign corporation that owns real estate in the United States sells it, the buyer (purchaser) must deduct 15% of the sale price as withholding tax and pay it to the Internal Revenue Service (IRS). For example, if you sell an investment from Japan or buy a temporary residence, you will also be subject to this withholding tax. Some states may also impose state taxes in addition to federal taxes.
Even if the sale price is less than the cost of acquisition, you cannot avoid the 15% withholding tax unless you have a withholding tax exemption certificate from the IRS. To obtain an exemption certificate, you must first submit an application Form 8288-B and a rationale for the exemption.
The 15% withholding tax is not a final tax and the seller must file a tax return Form 1040NR (Form 1120F for corporations) at a later date to settle the tax. At this time, the tax refund and additional payment will be made by attaching the transfer profit and loss statement and withholding slip form 8288-A.
Tax Exemption and Conditions for Proceeds from the Sale of a Home
The gain on sale of real estate is the capital gain after deducting acquisition costs, renovation costs, and transfer costs from the selling price of the residence. The tax rate on capital gains for 2023 is 15% to 20%.
When you sell your primary residence, you may be able to tax-free the proceeds up to $250,000 (single) or $500,000 (couples combined). However, the two-year ownership requirement, two-year residency requirement, and purpose of use requirement must be met at the same time. Ownership conditions refer to having ownership of a residence, residency conditions refer to actual daily living, and purpose of use conditions refer to using it as the main residence. If these conditions are not met, the non-taxable amount may be limited and taxable.
For example, if a property is temporarily used for rental purposes and then used as a primary residence, a portion of the proceeds from the sale may be subject to taxation.
Even if the residence is in the name of one of the spouses, if they apply married filing jointly, they can meet the ownership conditions and receive a tax exemption of up to $500,000. However, both spouses must meet the residency requirements.
Timing of Returning to Japan and Selling the U.S. Residence
If a Japanese person who lived in the United States sells a house that he or she lived in in the United States after returning to Japan, he will have to pay taxes in both the United States and Japan on the capital gain. The tax exemptions of $250,000 and $500,000 are based on US tax calculations and do not apply to Japanese tax law. Since this limit cannot be used for tax calculation in Japan, you will have to pay additional tax and miss the opportunity to save tax. That’s why you need to think carefully when choosing when to sell your home before you leave your home country.
In short, you need to be careful about taxes when selling the house you lived in after returning to Japan. It is important to understand that the US tax-exempt quota cannot be used for tax calculation in Japan, and to consider selling before returning to Japan so as not to miss the opportunity to save tax.
Summary
A 15% withholding tax is imposed on the sale of US real estate by foreigners and foreign corporations. Even if the sale price falls below the acquisition cost, it cannot be avoided without a withholding tax exemption certificate, and prior application is required to obtain an exemption certificate. The 15% withholding tax is not a final tax and can be settled by submitting a tax return (Form 1040NR or Form 1120F)
When you sell your main residence, some of the proceeds from the sale may be exempt from tax. The conditions must meet the two-year ownership, residency and purpose of use conditions.
If a Japanese person who lived in the US sells a US residence after returning to Japan, it is necessary to pay both US tax and Japanese tax. The US tax-exempt quota does not apply under Japanese tax law, and it is better to sell before returning to Japan.
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