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Residency Status Dictates Tax Treatment Of Gain


I am a United States resident alien and German national. I recently sold property in Germany and want to know if it is subject to tax in the United States. If so, which tax and how much? My parents gifted me the property but retained all rights to the property until it was sold. Niessbrauch was the form of ownership.


To determine if the gain is taxable in the United States, you must know whether you are a resident alien or nonresident alien for income tax purposes.

A resident alien is taxed on worldwide income. Usually, the gain on the sale of the German property would be reported as a capital gain on Schedule D, Capital Gains and Losses, of Form 1040, U.S. Individual Income Tax Return. It would be taxed at capital gain rates, with the top federal rate for most gains currently at 15 percent. Because you received the property as a gift, your cost basis in the property for the purpose of calculating the gain is your parents’ basis, or what they paid for it.

The ownership structure you indicated, Niessbrauch, is similar to a life estate in the United States, in which there is a current interest and a remainder interest. The current interest is the right to use the property until death, and the remainder interest is the right to property after the death of the current interest holder. The basis of property gifted as a remainder interest is increased, or stepped-up, at the death of the person retaining the life estate. However, because the property was sold prior to your parents’ deaths, you do not receive a step-up in basis.

A nonresident alien is generally subject to tax only on income from U.S. sources. Because the gain on German real estate is not such income, you would not owe any tax on it. If you are a nonresident alien for income tax purposes because of a tax treaty, you may need to file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).

You are a resident alien if you hold permanent U.S. residence (the “green card” test) or if you satisfy the “substantial presence” test. You meet the latter test if you are in the United States 31 days in the current year, and 183 days over three years that include the days in the current year, 1/3 of the days in the previous year and 1/6 of the days two years before. If you do not meet either of these tests, you are a nonresident alien for income tax purposes.

Of course, it is not this simple. Each test has exceptions and caveats. If you are a resident alien because you meet the substantial presence test, you may still be taxed as a nonresident alien if you prove a closer connection to a foreign country, which is based on facts and circumstances. The main considerations include: “more significant contacts;” location of permanent home, family, and belongings; country of residence; affiliations; the jurisdiction in which you hold a driver’s license; and the jurisdiction in which you vote. In addition, you must be in the United States for fewer than 183 days in the current year and have a tax home in the foreign country.

If you are a resident of the United States and a foreign country at the same time, apply the “tie-breaker” rules in the tax treaty. The tax treaty between the United States and Germany determines residency for taxing authority on the following questions, in order:

  • Where does the taxpayer have a permanent home?
  • Where are the taxpayer’s personal and economic relations closest?
  • Where does the taxpayer maintain a habitual abode?
  • Where is the taxpayer a citizen?

If the first question does not determine your status — because you have permanent homes in the United States and in Germany, or no permanent home in either country — you move on to the next question. Once you reach one that can break the tie, you have determined where you are a resident for income tax purposes. If none of these questions determines your tax residence, the taxing authorities of both countries will do so.

Other considerations for determining your income tax status include whether you are a dual-status taxpayer or are eligible for any exemptions. A dual-status taxpayer is a resident and nonresident alien in the same year, typically in the year of arrival or departure. Exemptions may be available for teachers, students and other professionals with certain visas during their first few years in the United States.

Answered by

Rebecca Pavese, CPA
December 2006