Question: My wife and I are non-resident aliens, and have owned our house for a number of years. We are going back home to Europe this summer and have put our house on the market. Because of the strong market, we expect to make at least $400,000 profit. We have lived in the home for at least 4 years, and file a joint tax return.

We were of the impression that we could take advantage of the "up to $500,000 exclusion," but our real estate agent has advised us that the settlement attorney will have to withhold 10 percent of the gross sales price.

Is that correct?

Answer: Probably not. There is a law on the books which is commonly referred to as FIRPTA, or formally known as the Foreign Investment and Real Property Tax. Congress, in the late 1970's, was concerned that many foreign persons or organizations had purchased real estate here in the United States, and when they sold it at a profit, they just took all of their money back home without paying any tax at all.

Accordingly, FIRPTA requires that in many situations, when a foreign person sells property here in America, 10 percent of the net sales proceeds (called the "amount realized") must be withheld and turned over to the Internal Revenue Service. According to the IRS, "withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests."

This is a complex law. However, when property is sold (whether it is residential or commercial), the settlement attorney or title company is obligated to inquire whether the seller is a foreign person that is subject to the withholding requirements of the law.

According to FIRPTA a foreign person is a nonresident alien individual, foreign corporations that have not elected to be treated as a domestic corporation, foreign partnerships or even foreign estates. It does not include a resident alien individual.

If the seller (transferor) falls within the reach of FIRPTA, then 10 percent of the sales proceeds must be withheld when the settlement takes place. If these funds are not withheld, the IRS can look to -- and assess -- the buyer for this tax.

The tax must be reported on IRS Form 8288 (or 8288-A) and must be transmitted to the IRS within 20 days after the property is transferred.

There are a number of exceptions to this withholding requirement.

• if the buyer acquires the property for use as a principal residence and the sales price is less than $300,000, no withholding is required. According to the IRS, the buyer (or a member of the buyer's family) "must have definite plans to reside at the property for at least 50 percent of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer." The IRS cautions that taxpayers are not permitted to count the days the property will be vacant.

• if the property is acquired by the United States, a state government or the District of Columbia;

• if the seller does not realize any money on the sale of the property, or the transferor gives the buyer (and the title attorney) written notice that no recognition of any gain or loss is required.

• If you have lived and owned your house here in the United States for two out of the past five years before it is sold, and you and your wife will file a joint tax return, you are entitled to a complete exemption of up to $500,000 of the gain you will make on the sale of your house. If you are not married -- or do not file a joint tax return -- this amount is reduced down to $250,000.

• If you were US citizens -- or resident aliens -- you are not required to report the sale on the tax return that you file for the year of the sale. However, since you are non-resident aliens, you must give written notice to the title attorney that no recognition of gain or loss is required. You must also make sure that your buyer -- or the title attorney -- files a copy of the notice by the 20th day after the property is sold with the IRS. Additionally, you must make sure that IRS Form 8288-B is filed with the IRS, and although the law allows either the transferor or the transferee to file this form, it is recommended that you -- as seller -- make sure that it is accomplished.

For further information on FIRPTA, you can obtain IRS Publication 515 entitled "Withholding of Tax on Nonresident Aliens and Foreign Entities", free of charge, either from the IRS website under "Publications," or by calling your local IRS office.

When you go to settlement, the attorney conducting the process will ask you to sign an affidavit as to your citizenship. Make sure that you keep a copy of this affidavit as well as the written notice that you must present to the attorney at closing.

FIRPTA has serious complications for both buyers, sellers, real estate agents and settlement companies. You must consult your attorney or financial advisor on your specific situation, and make sure that this is done well in advance of the day of settlement.

Published: May 30, 2005

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Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts. Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.