The actual tax you owe on the sale of your property will be based on the amount of capital gain you have on the sale of the property. Under U.S. rules, your basis in the property is your original purchase price, plus any improvements made to the property, plus any assessments paid for water or sewer services. Property taxes, interest, association dues, etc., are not included in the basis of the property.

The net sales proceeds are used to determine if you have a gain. This is calculated by taking the gross sales price, less the closing costs, such as the sales commission, the excise taxes, and the other charges from the escrow company.

Example: You purchase the property for $5,000.00. You are now selling for $12,000.00. The sales commission is $1,200.00. The other closing costs are $500.00. You have a capital gain of $5,300.00, ($12,000.00 - $5,000.00 - $1,200.00 - $500.00.)

If you have a capital gain, some amount of the withholding will be required. You may file for a withholding certificate, see below, to get the amount withheld reduced, but you will still have to file a tax return to show your true tax owed and to get a refund of as much of the tax withheld as possible.

If you have a loss on the sale, you may apply for a withholding certificate and get the amount to be withheld reduced to 0. This does not relieve you from the responsibility to file a tax return, however, this will keep the IRS from holding your money until the end of the year.

The Withholding Certificate

The "withholding certificate" is a way to get an early refund of the 10% withholding. You may apply as soon as you have signed the selling agreement. You may submit the application either before or after the sale closes. It may take from 2 weeks to 2 months to get it approved, depending on the complexity of the sale. Filing for a withholding certificate is a way to get an early refund only. You are still required to file a U.S. Tax Return at he end of the year.

The following items are need to file for a withholding certificate, and also to file a tax return and to calculate your gain or loss on the sale.

A copy of your original purchase document, showing the purchase price. A copy of the selling agreement (earnest money agreement) 
a signed form 8288-B. (This may be obtained from your Real Estate Agent or at a Accountants Office) 
If improvements were made to the property, a detailed list of the improvements showing the costs of each. Also, copies of the purchase slips or other documentation supporting the amounts showing. 
A copy of the closing statement from the sale, or a statement of the estimated closing costs. This may be prepared by the Real Estate Agent or the Escrow Company.

This information is being provided to you to assist you in determining your responsibilities in regards to the sale of your real property in the United States. This material is intended for informational purposes only, and should not be considered a complete discussion of the tax law relating to these matters. It is distributed with the understanding that Roy A. Lentz, CPA, and Point Roberts Realty Inc., are not rendering legal, accounting, or other professional services and assumes no liability whatsoever in connection with its use.

Roy A. Lentz
Certified Public Accountant
2509 Cedarwood, Suite #3
Bellingham, Washington 98225
Phone: (360) 734-2172
Fax: (360) 733-9350