There is a U.S. tax rule that allows an individual to exclude from tax up to $250,000 of gain ($500,000 for a husband and wife meeting certain conditions) from the sale of a home owned and used by that individual as a "principal residence" for at least two of the five years immediately prior to the sale. "Principal residence" is a technical term created by the U.S. government of course.

This rule may (at first impression) seem to conflict with the 10% withholding requirement when a nonresident alien sells U.S. real estate. That rule requires that 10% of the total sale price be withheld at closing and paid within 20 days to the IRS on behalf of the foreign seller. The seller either applies for relief if the tax is less than that amount or files an income tax return for a refund to claim back the excess withholding.

These rules do conflict – but here is the fact pattern that occurs where the $250,000/$500,000 exclusion of gain exception takes over and overrides the 10% FIRPTA withholding rule. We have dealt with several of our foreign national clients who have moved here on certain U.S. residency visas and lived here for many years. For various reasons they have moved back abroad and abandoned their U.S. residency visas so that, in effect, they have reverted back to nonresident alien status from resident alien status for U.S. income tax purposes. Many of these individuals did not sell their former principal residences until they moved back abroad and became nonresident aliens again.

So what! It does not matter that they were nonresident aliens when they sold their former U.S. principal residence. All that matters is that they lived in the property as their principal residence for two of the five years up to the date of sale. They are still subject to the 10% FIRPTA withholding, but can apply for relief claiming the benefits of the principal residence exclusion.

Here is an example of how the rule works. Mary and John Stanton are UK citizens. Mary was transferred to Orlando, Florida on a temporary work visa on July 8, 2003 to become an executive for a company here. Mary and John purchased a home in the Orlando area on August 28, 2003. Mary and her family lived here until August 2, 2007, at which time she moved back to the U.K. and surrendered her temporary work visa and reverted back to nonresident alien status. Mary and her husband filed joint U.S. income tax returns while they lived here. She listed her Orlando residence for sale on May 17, 2007, but because of poor market conditions was unable to sell the home until March 5, 2008.

Mary and John were nonresident aliens when they sold the Orlando property. However, because the home was their principal residence for two out of the five years up to the date of sale, they qualify for the exclusion of gain on the sale of a principal residence. Mary and John obtained an exemption from the 10% FIRPTA withholding by filing an application for relief.

We have successfully obtained numerous withholding certificates using strategies we have developed for handling these situations. Feel free to contact us at (727) 822-9393 or (941) 952-5848 if you want more information how these generous rules could apply to you or your client.