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How Non-Residents Can Request a Refund of Withheld Taxes on Property Sales in Puerto Rico

Selling property in Puerto Rico as a non-resident can come with some unique tax obligations. One of the most significant is the withholding tax applied to sales of real estate or shares located in Puerto Rico. However, if you meet certain requirements, you may be eligible to request a refund of that withheld tax. Here’s a guide to understand when this applies, the benefits, and the steps for non-residents looking to reclaim withheld taxes.

Understanding Puerto Rico’s Withholding Tax for Non-Residents

When a non-resident sells property in Puerto Rico, the buyer is typically required to withhold a portion of the sale price as tax. This amount can vary:

  • 15% withholding if the seller is a U.S. citizen,
  • 25% withholding if the seller is a foreign national, and
  • 29% withholding if the seller is a foreign corporation not doing business in Puerto Rico.

This withheld amount is then deposited with the Puerto Rico Department of Treasury as a tax on the seller’s potential profit from the sale. However, not every sale results in a profit, and some sellers may have already paid the relevant taxes on the gain. This is where the refund application comes in.

Do You Qualify for a Refund?

A non-resident seller may qualify for a refund if:

  1. You are a non-resident of Puerto Rico when you sell the property.
  2. A tax was withheld as part of the sale transaction.
  3. You can demonstrate that no profit was made in the transaction or that any required taxes on profit have already been paid.

Benefits of Applying for a Refund

If you meet the criteria, applying for a refund can help you recover the amount withheld during the sale, provided you submit adequate documentation to support your claim.

How to Apply: Required Documentation

Applying for a refund requires thorough documentation, so it’s essential to organize these key items:

  • Signed letter explaining your non-resident status and the date you ceased residing in Puerto Rico.
  • Representation letter indicating details about the property’s usage and confirming the non-resident status.
  • Authorization for representation if you have a representative applying on your behalf, completed on the official SC 2745 form.
  • Sale and purchase deeds for the property.
  • Closing Disclosure or settlement statement signed by all parties involved.
  • Evidence of the withheld tax, often found on a check or bank transfer.
  • Income Tax Return documenting any gain or loss on the sale, along with other Puerto Rico-source income if applicable.
  • Documentation for sales expenses claimed in your tax return, such as real estate commission, advertising fees, and appraisals, among others.

Additional Considerations

If the property was acquired through inheritance or donation, or if permanent improvements were made, additional documentation may be required. For example:

  • Inheritance: Certificates of tax lien cancellation and a copy of the will or heir declaration.
  • Permanent Improvements: Receipts, construction contracts, and evidence of payments for improvements made to the property.
  • Furniture Included in the Sale: Certification of the distribution of sale proceeds between real and personal property, along with cost and payment proof.

Filing the Application

The completed application, along with the required documentation, should be submitted to the Puerto Rico Department of Treasury by the 15th of the month following the sale date. Late submissions may result in the application being filed away without review, so timeliness is crucial.

Conclusion

Navigating Puerto Rico’s withholding tax refund process can be complex, especially for non-residents selling property on the island. However, with careful preparation and a clear understanding of the required documents, non-resident sellers can recover withheld taxes and maximize their returns on Puerto Rican property investments.

For more insights or questions about the withholding tax refund process, feel free to reach out in the comments below!

For further assistance or information, please contact us at [email protected] or 787-473-8985.

Disclaimer:
The information provided is for informational purposes only and should not be considered legal or tax advice. Consult with a qualified attorney or tax advisor to discuss your specific situation.

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