US Expats Living Abroad and Selling a US Rental: Exchange, Withholding and Reporting

The title company sees a foreign address; the statute sees a citizen

Closing agents screen for FIRPTA by address, so a seller with a home in Lisbon or Singapore should expect to be asked for withholding paperwork. The answer is the certification of non-foreign status. Section 1445(b)(2) lifts the buyer's withholding duty when the seller furnishes an affidavit, under penalty of perjury, that the seller is not a foreign person, stating a US taxpayer identification number; a foreign person is anyone other than a US person, and a citizen is a US person wherever they live.

Reg. section 1.1445-2(b)(2) sets the contents: the certification is furnished before or at the transfer, signed under penalties of perjury, and states that the transferor is not a foreign person together with the transferor's name, identifying number and home address. A Social Security number is the identifying number for an individual. The buyer may rely on it unless the buyer has actual knowledge it is false, and must keep it until the end of the fifth taxable year after the year of transfer.

Sign it early, with the overseas address exactly as it appears on your return, and send a copy to your qualified intermediary. Green-card holders are in a different position that depends on whether they have given up residence; the green-card answer and the page on moving abroad after an exchange cover that.

The state does not care where you live, only where the property is

State withholding is triggered by the property's location and the seller's status in that state, and an expat is a nonresident of every state. California's Franchise Tax Board requires withholding on sales or transfers of California real property, including exchanges, with full exemptions for sales of $100,000 or less and for other cases listed on Form 593, and it tells sellers to submit Form 593 to the escrow agent before closing. The exchange exemption and the intermediary's duty to withhold on boot are explained on the state withholding answer.

Other states have their own forms and lead times, some of them weeks before closing; the list of states that withhold and the page on exemption filing deadlines are the place to check yours. Withheld money is not exchange money, so an exemption missed is cash that leaves the exchange and becomes boot.

Your federal return timing is friendlier. The IRS page for citizens and resident aliens abroad confirms an automatic two-month extension to file, with interest accruing on tax unpaid after the regular due date, and a further extension to October 15 on Form 4868. Because the 180-day exchange period ends at the earlier of day 180 or the return due date including extensions, that extra time matters for a sale late in the year.

Whatever you buy, its income is US-source, and that decides which country gives the credit

Section 861(a)(4) treats rentals from property located in the United States as US-source income, and section 861(a)(5) treats gain on a US real property interest the same way. The source does not change when the replacement is a DST interest: under Rev. Rul. 2004-86 you are treated as owning an undivided fractional interest in the trust's real estate, so your share of its rent is rent from US property.

That has two consequences for an expat. First, the foreign earned income exclusion is of no help: section 911 excludes earned income, meaning wages, salaries, professional fees and other compensation for personal services, and rent is not that. Second, the direction of the foreign tax credit is fixed. Publication 514 places rents in the passive category, sources them to the location of the property, and states that the credit cannot reduce US tax on US-source income unless a treaty election re-sources it. The United States taxes the rent first; if your country of residence also taxes it, that country's credit mechanism is where double taxation is relieved.

Ask a cross-border adviser two questions before you choose a replacement: does your country of residence credit US tax on rental income, and does a treaty with the United States re-source any of it? The answers decide whether a DST's distributions are taxed once or twice, and they differ by country in ways this page cannot cover.

Hypothetical: a $900,000 California rental sold from eight time zones away

Round numbers, hypothetical: a citizen living in Europe sells a California rental for $900,000 with an adjusted basis of $400,000. She signs the non-foreign certification, so no FIRPTA withholding. She delivers Form 593 to escrow claiming the exchange exemption, so California withholds nothing at closing; had she missed it, the state would have held a percentage of the price and that amount would have left the exchange as cash.

The sale closes on November 20. Day 45 is January 4 and day 180 is May 19 of the following year. Her return is automatically due June 15 because she lives abroad, so the exchange period reaches the full 180 days without her filing anything; a domestic seller with the same dates would have needed Form 4868 to get past April 15.

She identifies two all-cash DST interests and closes both in February by courier and electronic signature. Her share of the trusts' rent is US-source and reported on her Form 1040; her country of residence taxes it too and credits the US tax under its own rules. Run the two-country numbers with an adviser who files in both places before you sign the identification.

Why the replacement is usually a debt-free DST, and what you give up

An expat buying a replacement building faces a lender who wants US income, US credit and a borrower who can be served with papers; a property manager who needs instructions in a different time zone; and the risk that a roof, a tenant or a code notice needs a decision at 3 a.m. your time. An all-cash DST interest removes the lender and the manager and closes on subscription documents, which is why it is the common choice from abroad.

The trade is control and liquidity. A DST interest cannot be sold on demand, the trustee decides when the property sells, distributions can be cut or suspended, and principal can be lost; the illiquidity page sets out the exits that do exist. Owners who want to keep the decision to sell in their own hands can look at a whole property through a direct title security, accepting that they own and oversee a specific building from abroad.

Whatever you choose, the replacement must be US real property. Buying in the country you live in is not like-kind, and that rule, together with the mechanics of signing from overseas, is on the live-abroad answer.

• Sign the non-foreign certification with your SSN and overseas address before closing; keep a copy with the exchange file.
• File the state exemption form with escrow by the state's deadline, not on closing day.
• Diary day 45 and day 180 in US time, and confirm whether June 15 or an extension sets the outer limit.
• Give your foreign accountant the DST year-end statements; the rent is US-source whatever the trust owns.
• Keep every identification and closing signature on documents your intermediary accepts electronically.