Sale of real property outside of the US

PART 1

U.S. itizens re enerally taxed on their worldwide income regardless of where the income is earned or received.

Facts

• US Citizen sold residential property outside of U.S.

• Property is located in the Philippines

Income from Sale of Real Property

U.S. Code 862: Gain from the disposition of real property is sourced according to the location of the real property. Generally, expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or deductions which cannot be definitely allocated to some item or class of gross income are deductible.

Article 7 of  Philippines-US tax Treaty

• Income from real property, including royalties and other payments in respect of the exploitation of natural resources and gains derived from the alienation of such property or of the right giving rise to such royalties or other payments, may be taxed by the Contracting State in which such real property or natural resources are situated.

• The sale of property in the Philippines is subject to Philippine taxation.

• Gains derived from the sale of real property not used in a business are subject to 6% final withholding tax based on the sale price or fair market value, whichever is higher.

• Relief from double taxation: The United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines.

Taxes paid in relation to the sale of your property in the Philippines

Taxes can be claimed in your tax returns in one of two ways:

• Deduction to Form 1040, Schedule A, or

If qualified, you may deduct taxes paid to the Philippines on your Form 1040, Schedule A, Line 8. We will use this approach if it provides more benefits than claiming foreign tax credit.

• Foreign Tax Credit

The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

Qualifying Tests for the Credit

The tax must meet four tests to qualify for the credit:

• The tax must be a legal and actual foreign tax liability

• The tax must be imposed on you

• You must have paid or accrued the tax, and

• The tax must be an income tax (or a tax in lieu of an income tax)

Taxes Withheld on Income or Gain Other Than Dividends

For income or gain (other than dividends) paid or accrued on property, you cannot claim a foreign tax credit for withholding tax (defined later):

• If you have not held the property for at least 16 days during the 31-day period that begins 15 days before the date on which the right to receive the payment arises, or

• To the extent you have to make related payments on positions in substantially similar or related property.

When figuring how long you held the property, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss.

Withholding Tax  

For this purpose, withholding tax includes any tax determined on a gross basis. It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis, IRS Publication 514.

Foreign Bank Account Reporting FBAR)        

U.S. citizens with financial interest in, or signature authority over, any financial accounts with an aggregate value of more than $10,000 at anytime during the calendar year, including, bank, securities or other types of financial accounts in a foreign country are required to report that relationship by filing FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). If you had any financial accounts in the Philippines that had a value of $10,000 or more at anytime during 2017, you are required to file an FBAR. Even if you did not receive any kind of payment or income from the accounts during the year, you are still required to report them.

When to File

If you or your entity has financial interest in or signature authority over, any foreign accounts, it is your responsibility to provide our firm with all the information needed to prepare the Report of Foreign Bank and Financial Accounts (FBAR) required by the U.S. Department of the Treasury. Beginning the 2017 filing season or the 2016 tax year, reports are now due April 15. However, for the first time, a six-month extension to Oct. 15 is made available to taxpayers.

Noncompliance

A taxpayer who willfully fails to comply with the FBAR requirements may face a penalty equal to the greater of $100,000 or 50% of the foreign financial account balance as of the June 30 FBAR due date. This penalty applies to each year open under the statute of limitation. The maximum penalty under Title 31 for a non-willful failure to file an FBAR is $10,000 per account per year. Noncompliance with the FBAR requirements is a felony, which is punishable by five years in prison, a fine of $250,000, or both.

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Disclaimer: Any accounting, business or tax advice contained in this communication is neither intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

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Al-os & Associates  Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.