US Nonresident Cgt

Quick reference

Quick reference

Item	Value
General rule	Non-resident aliens are NOT taxed on US-source capital gains
Exception 1	FIRPTA: gains on US Real Property Interests (USRPIs)
Exception 2	ECI: gains that are Effectively Connected Income with a US trade/business
FIRPTA withholding	15% of gross proceeds (10% if property ≤ $1M and used as residence)
Legislation	IRC §897 (FIRPTA), §864(c) (ECI), §1441–1442 (withholding)
Form	8288 (withholding), 8288-A (seller's copy), 8288-B (withholding certificate)

General rule: capital gains of non-resident aliens

• General rule for NRA capital gains — A non-resident alien (NRA) is generally not subject to US tax on capital gains from US-source assets (e.g. publicly-traded US stocks, bonds, options) unless: the NRA is present in the US for 183+ days in the tax year (special rule — different from the SPT residency test), OR the gain is ECI, OR FIRPTA applies

FIRPTA: US Real Property Interests

• USRPI treatment under FIRPTA — Under IRC §897, gain from the disposition of a US Real Property Interest (USRPI) by a non-resident is treated as ECI and taxed at normal graduated rates. (IRC §897)
• USRPI includes — US real property (land, buildings); Interests in a US Real Property Holding Corporation (USRPHC) — a domestic corporation where > 50% of the fair market value of its assets consists of USRPIs
• USRPI does NOT include — Interests in publicly-traded REITs below 5% ownership threshold; Interests in domestic corporations that are not USRPHCs

FIRPTA withholding

• Buyer withholding obligation — The buyer must withhold from proceeds: 15% of the gross sales price (general rule); 10% if the property will be used as the buyer's residence AND price ≤ $1,000,000; 0% if price ≤ $300,000 AND buyer intends to use as primary residence
• FIRPTA withholding rate - general — 15% percent of gross sales price
• FIRPTA withholding rate - residence ≤ $1,000,000 — 10% percent of gross sales price (property will be used as buyer's residence AND price ≤ $1,000,000)
• FIRPTA withholding rate - residence ≤ $300,000 — 0% percent of gross sales price (price ≤ $300,000 AND buyer intends to use as primary residence)
• Treatment of withheld amounts — Withheld amounts are payments on account. The NRA files a US return (Form 1040-NR) and the withholding is credited against actual tax owed.

Withholding certificate (Form 8288-B)

• Withholding certificate application — The seller can apply for a withholding certificate to reduce withholding to the estimated actual tax on the gain (rather than 15% of gross proceeds). Must apply before or on the date of transfer. IRS has 90 days to act. (Form 8288-B)

ECI (Effectively Connected Income)

• ECI taxation — Gains from assets used in, or held for, a US trade or business are treated as ECI and taxed at normal graduated rates on Form 1040-NR.

Publicly-traded US stocks: no FIRPTA, no NRA tax

• No US tax on publicly-traded stock gains — A non-resident alien selling shares in a US publicly-traded company (not a USRPHC) — e.g. Apple, Google, Microsoft — does not pay US tax on capital gains from those shares. This is one of the most widely misunderstood points.
• Dividend withholding on publicly-traded shares — 30% percent (reducible by treaty)

Treaty reductions

• Treaty reduction of capital gains taxation — Many US DTAs reduce or eliminate US taxation of capital gains for NRAs: Article 13 of OECD-model treaties typically grants exclusive residence-country taxation of gains on personal property (non-real property); FIRPTA gains may still be taxed by the US under most treaties (real property carve-out)
• Form to claim treaty position — File Form 8833 to claim a treaty position. (Form 8833)

Sources

• IRC §897 (FIRPTA), §864 (ECI), §1441 (withholding)
• IRS Publication 515 (Withholding of Tax on Nonresident Aliens)
• IRS: irs.gov/individuals/international-taxpayers/firpta-withholding

Working paper only. USRPHC determination requires analysis of the corporation's assets. Engage a qualified US tax adviser for FIRPTA transactions.