Foreigner's Sale Subject to IRS 'Hold Back'

  Question: My wife and I are retired snowbirds from Canada who are planning to sell 10 acres of land in north Scottsdale in the near future. Even in this “down” market, the value of the land is at least $600,000. Although we originally were planning on building a home there, we decided that we did not want to live that far away and recently bought a condominium near Scottsdale Fashion Square. Our real-estate agent has said that when we sell this land, the Internal Revenue Service will “hold back” 10 percent of the sale proceeds. I assume “hold back” means that at some point we will be able to reclaim this 10 percent “hold back.” Am I correct?

  Answer: Yes. Under the Foreign Investment in Real Property Tax Act, the sale of U.S. real property owned by a non-resident alien is subject to 10 percent withholding, or a 10 percent “hold back.” The reason for this “hold back” is to prevent a non-resident alien from taking the sales proceeds back to his or her home country. If there was any taxable gain on the sale, the United States would have great difficulty in collecting any tax owed. The procedure for the 10 percent withholding is that at closing the title company pays from the seller’s proceeds the 10 percent “hold back” to the IRS. The taxpayer then files a U.S. tax return, and the 10 percent “hold back” will be a credit on that tax return for any tax owed. If the taxpayer owes no tax, the 10 percent “hold back” payment will be refunded to the taxpayer. However, there are several exceptions to the 10 percent “hold back” requirement. The primary exception is that homes that sell for less than $300,000 are not subject to the “hold back” requirement if the buyer will use the home as a primary residence.

  If you would like assistance regarding commercial or residential transactions, potential litigation, HOA issues, estate planning or other legal matters, please call our office at 602.957.9810 and arrange for an initial consultation with one of our real estate attorneys.