Real Property Capital Gains Taxation for Non-Resident Aliens Residing in Germany

Real Property Capital Gains Taxation for Non-Resident Aliens Residing in Germany

Taxation of Non-resident Aliens in the U.S. 

A non-resident aliens (“NRA”) will generally be subject to U.S. income taxation on gains derived from the liquidation of U.S. real property. (IRC § 897).

NRA`s are defined as individuals who are neither a citizen of the U.S. nor a resident as defined by IRC § 7701(a). See IRC § 7701(b). If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet one of two tests:

  • the green card test or
  • the substantial presence test for the calendar year (January 1 – December 31).

If you do not meet either the Green Card Test or the Substantial Presence Test, then you are a nonresident alien. 

Please note: The definition of residency in the Germany-U.S. Income Tax Treaty is somewhat diffrent from the definition of residency under IRC § 7701. thus, if you have a residence in Germany and in the U.S., you may be treated as a non-resident alien if your permanent establishment is Germany or if you are more closely connected to Germany. See Art. 4 of the treaty. 

Calculation of the Capital Gains Tax in the U.S.

The tax will depend on the capital gain and on the applicable tax rate.

Calculation of Capital Gains

If you are an NRA your capital gains (basis) is determined in the same way as if you were a resident: Take the sales price then deduct selling expenses, from the amount realized. Then deduct the original cost of property, plus expenses deemed to have increased its value, less claims which have notionally decreased its value. 

Please note: the basis in U.S. situs real property obtained by inheritance is the fair market value of the property as of the date of the decedent’s death. See IRC § 1014(a)(1).

Tax Rates applicable to Short Term Capital Gains

For real property bought and sold within a year, the NRA will be subject to short term capital gains taxation.

The rates applicable to short term capital gains mirror the rates for regular income and they are taxed at a progressive rate with a maximum rate of 39.6%. NRAs with long term capital gains will generally be taxed at a rate of 15%. The maximum rate for long-term capital gains is 20%. The majority of capital gains associated with the liquidation of real property are long-term capital gains. The chart included below shows how the taxes are calculated.

Marginal Tax Rate (Tax Bracket)

Long-Term Capital Gains Tax Rate

10%

0%

15%

0%

25%

15%

28%

15%

33%

15%

35%

15%

39.6%

20%

Tax Rates applicable to Long-Term Capital Gains

A NRA’s long-term capital gains taxation will depend on their U.S. source income and their corresponding tax bracket. Once the NRA’s tax bracket is determined, the NRA can review the chart below and determine the applicable long-term capital gains tax rate.

U.S. Withholding Triggered by Sale of U.S. Situs Real Property

Pursuant to IRC § 1445, the transferee agent associated with a NRA seller of real property, must withhold 15% of the gross sale price for properties sold in excess of $300,000. Properties sold for less than $300,000 and acquired by the NRA to be used a residence do not trigger withholding. See IRC § 1445(b)(5). The withholding serves to secure the U.S.’s tax claim. Within 10 days after closing, the transferee agent (escrow company, agent, etc.) must pay the amount deducted to the IRS, the U.S. tax authority, using Form 8228. To prove payment, the seller receives the filled-out Form 8288-A. This form is to be attached to Form 1040NR. In case of overpayment, reimbursement can be claimed in the 1040NR.  

Taxation in Germany on Gains from the Disposition of U.S. Situs Real Property

Pursuant to Art. 13 of the Germany-U.S. Income Tax Treaty, the income that an individual residing in Germany derives from the deposition of real property located in the U.S.  may be taxed by the U.S. only and Germany may not tax it. However, there is a progression proviso (See Art. 13 in conjunction with Art. 23 (3) letter a p. 1 and 2 of the treaty, Sec. 32 b Abs. 1 Nr. 3 German Income Tax Act (EStg). Accordingly, the capital gain from the sale must also be declared on the German income tax return.

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