The FIRPTA Affidavit: A Buyer’s Only Safe Harbor

Posted on by Phil Querin

A Wrong-Headed Law? Most people have never heard of the Foreign Investment in Real Property Tax Act, commonly known as “FIRPTA” – unless they have been involved in the “disposition” (i.e. sale/purchase)[1] of U.S. real property from a “foreign person”.[2]

The FIRPTA law says that if the seller is a “foreign person”, the “transferee” – i.e. the buyer, is the “Withholding Agent”[3] that is legally responsible for collecting the tax and forwarding it to the IRS. Any lay person could be forgiven for thinking it is wrong-headed to make the buyer responsible for their seller’s tax liability. But this has been the law for nearly 40 years. And that’s not all. The IRS says:

In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.

Huh? It’s true! The premise is that the seller may not be in the country at the time of closing, or may be long gone by the time the IRS finds out.  So while this may sound harsh, it’s likely the only way to administer a law that attempts to tax foreign nationals when they dispose of U.S. real estate – short of having an IRS agent attend every real estate closing.

FIRPTA Primer.  What follows is the Readers Digest version of FIRPTA.

  1. The Withholding Requirement will not apply, even if the seller is a “foreign person” if (a) the purchase price of the property does not exceed $300,000; and (b) The property will be occupied as a residence by the buyer (who is an individual or a member of the buyer’s family) (iii) for at least 50% of the number of days (excluding days the property is vacant) it is used by such person during each of the first two 12-month periods following the date of closing;
  2. The Withholding Requirement is ten percent (10%) of the purchase price when the seller is a “foreign person” and the purchase price is over $300,000, but less than $1,000,000, and (1)(b) and (c) above apply; and
  3. The Withholding Requirement is fifteen percent (15%) of the purchase price when the seller is a “foreign person” and the purchase price is over $1,000,000, or the purchase price is $1,000,000 or less, and Seller does not qualify for any of the exemptions in (1) or (2) above.

The “What Ifs?”  So how does one go about determining if the seller is a “foreign person”?  If the seller is an individual, the easiest way is to ask for their social security number. If the seller is a business entity, you can ask for the employer identification number.

  • But what if the seller declines to turn over their social security number of EIN to their buyer? In the Oregon statewide sale agreement form, the seller affirmatively represents that they are not a foreign person. And the RMLS™ includes a place for a seller to declare whether they are, or are not, a foreign person. So isn’t that good enough? No.
  • What if the seller gives me a social security number that is bogus? Am I protected against failing to withhold, since the seller conned me? Not really.

The FIRPTA Affidavit. The only fail-safe protection is to have the seller sign a “FIRPTA Affidavit” – also known as “Affidavit of Non Foreign Status”. This simple form, containing a certification under oath that the seller is not a “foreign person” and disclosing the transferor’s name, U.S. taxpayer identification number[4] and home address (or office address, in the case of an entity), will insulate the buyer so long as the buyer does not have actual knowledge that it is untrue, i.e. that the seller is a “foreign person”.  (Note that the buyer’s real estate agent can be held liable to the extent of their commission if they have actual knowledge that the seller is a foreign person, and there has been no withholding.)(Go to this link for sample Affidavit form.)

The more complicated issue with the Affidavit is retention; who is to hold it for the required 5-year period?  Since it contains the seller’s social security number (or employer identification number), sellers are understandably reticent to permit their buyer to have this information, for fear of it getting into the wrong hands and resulting in identity fraud.

In an effort to address the issue, a law was enacted to permit someone other than the buyer hold the Affidavit. Thus, was created the “Qualified Substitute” rule, which contemplated that the title company or attorney closing the transaction would serve in that capacity.[5] However, in Oregon at least, several title companies quietly demurred, leaving the task to the buyer.  This may be changing, however, and more companies have recently been coming around, as they see the competition promoting their services as a Qualified Substitute.

Buyer Tip.  If there is any concern about whether FIRPTA could apply to your transaction, make sure your title company will serve as the Withholding Agent to pay the mandatory tax to the IRS (if FIRPTA applies), or serve as the Qualified Substitute (if it does not apply).  

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[1] Note that many other transactions also qualify as “dispositions”, such as gifts, redemptions, capital contributions, etc.

[2] According to the IRS here, a “foreign person” is a nonresident alien individual, foreign corporation that has not made an election under section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual.

[3] “You are a withholding agent if you are a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.” See, Withholding Agent information from IRS, here.)

[4] The IRS recognizes the following as “Taxpayer Identification Numbers”: Social Security Number “SSN“; Employer Identification Number “EIN“; Individual Taxpayer Identification Number “ITIN“; Taxpayer Identification Number for Pending U.S. Adoptions “ATIN“; and Preparer Taxpayer Identification Number “PTIN“.

[5] “The transferor can give the certification to a qualified substitute. The qualified substitute gives you a statement, under penalties of perjury that the certification is in the possession of the qualified substitute. For this purpose, a qualified substitute is (a) the person (including any attorney or title company) responsible for closing the transaction, other than the transferor’s agent, and (b) the transferee’s agent.” (See, Exceptions from FIRPTA Withholding,  here.)

Posted in FIRPTA, Legislation - Federal, Miscellany, Real Estate Laws, Realtor Risk Management, Tax Issues | Tagged
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