Selling your US home before you move back to India

A house is usually the biggest asset in an NRI family's US life, and the sale usually lands in the same year as the move. Three things decide the result: the exclusion of the gain, the withholding at closing, and your residency on the day of sale.

The home sale exclusion

If the home is your main residence, up to $250,000 of gain is excluded from income, or $500,000 on a joint return. You must have owned the home for at least 24 months and lived in it as your main home for at least 24 months within the five years before the sale. The two periods need not overlap, and for the $500,000 figure both spouses must meet the use test.

If you sell before reaching 24 months because of a change in place of employment, a reduced exclusion may be available, in proportion to the time you owned and used the home. The tax regulations treat a job move of at least 50 miles farther from the home as a safe case, and a smaller move can qualify on its facts. A move back to India for a new job generally fits. A move for retirement or family reasons needs closer analysis. Publication 523 covers the rules.

You report the sale if you receive a Form 1099-S, even when the whole gain is excluded. Any taxable part goes on Schedule D and Form 8949.

The trap: withholding if you are a foreign person at closing

If the seller is a foreign person, the buyer is generally required to withhold 15% of the amount realised and send it to the IRS. This is the withholding law known as FIRPTA, and it applies to the whole sale price, not to the gain. On a $700,000 sale that is $105,000 held back at closing, whatever the gain turns out to be.

There are two ways out:

• Sell while you are a US resident and give the buyer a certification that you are not a foreign person. No withholding applies.
• Apply for a withholding certificate on Form 8288-B, which lets the IRS reduce or eliminate the withholding based on your real gain. The IRS normally acts within 90 days of receiving everything it needs, so the application has to be made before closing, not after.

There is also an exception for a buyer who will live in the home, where the price is $300,000 or less, which is rarely relevant to a family house. A reduced rate applies between $300,000 and $1 million.

Any amount withheld is a payment against your tax, not the final bill. If the real tax is lower, you recover the difference by filing a return, and that takes months.

Why the date of sale matters

Whether you are a resident or a foreign person on the closing date depends on your residency dates. In a year of departure that can be unclear, because you may be a resident for part of the year and not for the rest. See the dual-status article. Green card holders remain residents until the status is formally ended.

The simplest path is to close the sale while you are unambiguously a resident, then move. If the sale must close after you leave, settle your status, and start the Form 8288-B application, weeks before the closing date.

What else to settle

1. Capital gains tax on any taxable part. Long-term gain on a home held over a year is taxed at the long-term rate. The exclusion covers many sellers entirely, but a long holding in a high-priced market can exceed the cap.
2. State tax. Some states withhold on sales by non-residents and some tax the gain. See state taxes.
3. Keeping it as a rental. You can keep the house and rent it. A non-resident's rent is taxed at a flat 30% of the gross unless you elect to be taxed on the net, which usually works better. Depreciation taken on a rental is recaptured when you eventually sell.
4. Moving the money to India. Ask the Indian bank which account type should receive it, and what documents it needs.
5. India's view. Whether India taxes a foreign gain depends on your Indian residential status in the year, and in the years just after returning there is often a transitional category. See the 182-day rule. Take Indian advice before a sale that falls in your first Indian tax year.
6. Exit tax. If you hold a green card for a long time, read the exit tax article before you choose a departure date.

The 15% withholding is the item that surprises people. It is avoidable with planning, but not after the closing.