A foreign individual sells a rental property in the U.S. for $500,000, and the buyer withholds $75,000 (15%) under FIRPTA.
Calculate Actual Gain: Assume the original purchase price was $350,000 and there were $50,000 in improvements, making the adjusted basis $400,000. The gain on the sale is $100,000 ($500,000 – $400,000).
Determine Tax Liability: If the actual tax owed on the gain is $20,000 based on the applicable tax rates for the seller’s situation.
File Tax Return: The seller files a Form 1040NR for the year of the sale, reporting the gain and calculating the tax owed as $20,000.
Report Withholding: On the same return, the seller reports the $75,000 withheld as a payment.
Receive Refund: Since the withholding ($75,000) exceeds the tax liability ($20,000), the seller will be entitled to a refund of $55,000 ($75,000 – $20,000).