Nonresident Alien’s Home Sale
The United States tax code provides taxpayers with a home sale exclusion that can help reduce tax liability. Here, discover details about whether this tax benefit also applies to nonresident aliens who sell a residence within U.S. borders.
Does a nonresident alien qualify for the Section 121 home sale exclusion? It seems the answer is yes if the nonresident alien otherwise meets the ownership and occupancy requirements.
“ Reg §1.1445-3(5) - Special rule for exclusions from income under section 121. A withholding certificate may be sought on the basis of a section 121 exclusion as a reduction in the amount of tax due under paragraph (c)(2)(v) of this section. The application must include information establishing that the transferor, who is a non-resident alien individual at the time of the sale (and is therefore subject to sections 897 and 1445) is entitled to claim the benefits of section 121. For example, a claim for reduced withholding because of section 121 must include information that the transferor occupied the U.S. real property interest as his or her personal residence for the required period. ”
-
California Differences - Resident & Nonresident Aliens
An individual who is a non-resident alien for federal tax purposes is required to file a California resident return reporting worldwide income if he or she meets the state’s residency requirements, regardless of the individual’s federal immigration status. California recognizes an IRS-assigned ITIN as a legitimate taxpayer ID number, including for state benefits such as the Cal EITC, Young Child Credit and the Covid-relief Golden State Stimulus program.
The following is an overview of the withholding requirements for non-resident taxpayers; consult FTB Publication 1017 for full details. M
FTB Form 593 Expanded, Other Forms Eliminated - Effective January 1, 2020, and in an attempt at simplification, real estate withholding forms 593-C, 593-E and 593-I were eliminated, with the tasks and/or information previously done or included on them transferred to an expanded Form 593. See Chapter 3.17 for more information on real estate withholding for both residents and non-residents.
FTB Forms 592-PTE and 592-Q – Beginning on January 1, 2020, the FTB has a new 592-PTE, Pass-Through Entity Annual Withholding Return. Form 592-PTE is an annual form for a pass-through entity (PTE) to allocate withholding credit to its payees. Withholding payments associated to Form 592-PTE are still due each payment period, and submitted with new Form 592-Q, Payment Voucher for Pass-Through Entity Withholding.
Nonresident Income Subject to Withholding - California Revenue and Taxation Code (R&TC) Section 18662 requires withholding of income or franchise tax on payments of California source income made to non-residents of California. The withholding rate is generally 7% (12.3% for non-U.S. partners who are individuals). The following California source income is subject to withholding (FTB Publication 1017):
-
Payments to non-residents for services rendered in California.
-
Payments made to non-resident entertainers for services rendered in California.,
-
Payments received for a covenant not to compete in California.
-
Payments releasing a contractual obligation to perform services in California.
-
Income from options received because of performing personal services in California.
-
Bonuses paid for services performed in California.
-
Rents and royalties from assets located in California.
-
Prizes and winnings received by non-residents for contests in California.
-
Distributions of California source income.
Withholding is optional and at the discretion of the withholding agent on the first $1,500 of income paid for the calendar year to each payee.
Withholding Exemption Certificate - California Form 590, Withholding Exemption Certificate, is used to certify an exemption from non-resident withholding. It does not apply to payments of wages to employees. It does not apply to sellers of real estate, which must use Form 593 (593-C prior to 2020). Form 590 is certified by the payee.
Reduced Withholding for Foreign Partners - The FTB conforms to Federal Treasury Regulation 1.1446-6 procedures, which allow foreign partners to request reduced or no withholding of California tax on effectively connected taxable income from California sources allocable to a foreign partner. The foreign partner certifies to the partnership, and to the FTB, that no or reduced California tax will be due. If the FTB approves the request, the FTB will notify the foreign partner and the partnership.
Foreign partners can request reduced withholding from the FTB annually before the first instalment period using FTB Form 589, Non-resident Reduced Withholding Request. See FTB Form 589 instructions for details.
A foreign partner must submit a completed and signed IRS Form 8804-C, Certificate of Partner-Level Items to Reduce
Section 1446 Withholding, with FTB Form 589. On line 10 of the Form 589, enter the total of California amounts from 8a through 8f of Form 8804-C.
How to Request and Report Foreign Partner Reduced Withholding - If a partnership allocates California source income to a foreign partner, all of the following must be true for the partnership to withhold a reduced amount for a foreign partner:
-
The foreign partner submits to the partnership a completed and signed IRS Form 8804-C, and,
-
The foreign partner submits to the FTB Form 589 with a signed copy of IRS Form 8804-C attached, allowing the FTB at least 21 business days before the first instalment period, and,
-
The FTB has provided the foreign partner and the partnership a Request for Reduced Withholding - Approved letter.,
How to Report Foreign Partner Reduced Withholding - If the above requirements are met, then the partnership withholds the amount approved by FTB, and:
-
Submits the withheld amounts using FTB Form 592-A, Payment Voucher for Foreign Partner or Member Withholding. See Form 592-A for payment due dates.,
-
At the close of the taxable year, completes and files FTB Form 592-F, Foreign Partner or Member Annual Return. Form 592-F allows reporting of total withholding for the year and allocates to foreign partners the income or gain and related withholding.,
-
Provides the foreign partner with a statement showing the total income allocated and the total amount withheld. The partnership can use a printed or electronic FTB Form 592-B, Resident and Non-resident Withholding Tax Statement, for this purpose. See FTB Form 592-B instructions for due dates and details.,
-
Keeps the approved letter, and FTB Forms 592-A, 592-F, and 592-B for a minimum of four years.,
In general, the FTB conforms to IRC 1446 and the 10-day notification of withholding for foreign payees. The foreign partner claims credit for the withholding by attaching a copy of the FTB Form 592-B when filing a California tax return. The FTB Form 592-B is proof of California source income and withholding.
On-line requests available The FTB website – www.ftb.ca.gov – has information, forms, and details on how foreign partners can request reduced withholding online. Type in “electronic Form 589” in the search box on the FTB web page.