Out-of-State and Overseas Sellers: IT-2663 and FIRPTA

“I’ve moved to New Jersey.” “I live abroad and want to sell my New York apartment.” Sellers like these often get a surprise at closing: before they receive the sale proceeds, a large amount is withheld for taxes. Two separate sets of rules are involved: New York State’s IT-2663 and the federal FIRPTA rules.

First, Tell Them Apart: “New York Nonresident” vs. “Foreign Person”

A Chinese national living in China who sells New York property is usually subject to both.

“Foreign person” is a tax status, not a matter of citizenship. Green card holders and people who meet the substantial presence test are generally U.S. tax residents and are not subject to FIRPTA.

1. New York State IT-2663

A New York nonresident selling New York real property must complete Form IT-2663 at closing, compute the gain, and pay estimated tax at the highest New York rate. The form and payment are submitted to the recording officer with the deed, and the deed cannot be recorded without it. Co-op apartments use the similar Form IT-2664.

No estimated payment is required (the seller checks the appropriate box in Part 3) when, for example:

• The property was the seller’s principal residence under federal Section 121 and the gain is within the exclusion;
• The sale is part of a like-kind exchange under federal Section 1031;
• The sale produces no gain or a loss;
• Other situations listed in the instructions apply.

The payment is only an estimate. The seller files a New York nonresident income tax return the following year, and any overpayment is refunded or any shortfall paid then. The estimated payment cannot be refunded before that return is filed.

Property owned by a company or LLC is subject to different rules and needs separate analysis.

2. Federal FIRPTA

Under the Foreign Investment in Real Property Tax Act (FIRPTA), when a foreign person sells U.S. real property, the buyer must withhold a percentage of the price and remit it to the IRS within 20 days after closing. A buyer who fails to withhold can be held liable, so the buyer’s attorney will insist on it.

Note: the rate applies to the gross price, not the gain. Even if the seller made no profit or lost money, the withholding applies unless something is done.

Reducing the withholding: a withholding certificate (Form 8288-B)

Before closing, the seller can apply to the IRS for a withholding certificate that reduces or eliminates the withholding based on the actual tax due (for example, because of a loss, a small gain or a 1031 exchange). If the application is submitted before closing, the buyer can generally hold the withheld amount in escrow until the IRS responds, then remit the approved amount and release the rest to the seller. IRS processing usually takes months. The seller needs an Individual Taxpayer Identification Number (ITIN), which can be applied for at the same time.

A seller who is not a foreign person signs a certification of non-foreign status (a “FIRPTA affidavit”) at closing, and the buyer does not need to withhold.

An Example

A foreign seller living abroad sells a Queens condo for $900,000. The purchase price was $700,000, for a gain of roughly $200,000. The buyer is not buying it as a residence.

• FIRPTA withholding: $900,000 × 15% = $135,000;
• New York IT-2663 estimated tax: about $200,000 × 10.9% = about $21,800;
• In total, about $157,000 could be held back at closing, far more than the tax actually owed on this sale.

The excess can be recovered by filing returns, but that may take more than a year. Applying early for a FIRPTA withholding certificate can greatly reduce the amount tied up.

Other Preparation for Overseas Sellers

• Power of attorney. If you are abroad, it usually must be notarized at a U.S. consulate or apostilled;
• Receiving the proceeds. Confirm with your attorney and bank in advance whether funds will go to a U.S. or overseas account, and beware of wire fraud;
• Tax filings in both countries. Your home country may also require you to report or pay tax on the sale, so consult a local tax adviser as well.

Attorney’s Insight

For nonresident and foreign sellers, the biggest risk is not paying too much tax but failing to plan and having funds tied up for a long time. Our advice:

• Start on the tax paperwork as soon as you decide to sell. A FIRPTA withholding certificate application must be submitted before closing, and an ITIN application also takes time;
• Gather proof of your cost basis: your purchase closing statement, renovation invoices and co-op or condo fee records. These support the gain calculation and any request to reduce withholding;
• Think about long-term estate planning. If a non-U.S. person dies while owning U.S. real estate directly, the U.S. estate tax exemption is only $60,000 (unless a tax treaty applies), compared with $15 million for U.S. citizens and residents. Overseas clients who continue to own U.S. property should talk to an attorney about how it is held.

Attorney’s perspective

Out-of-state and overseas sellers often face withholding and extra forms. We prepare these early and coordinate remote signing and authentication, so the closing is not delayed.

For advice about your own situation, call +1 718-218-5805 or schedule a consultation. We meet clients in Flushing and Manhattan, in English or Chinese.

Series overview

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

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