What follows is a summary of tips when the seller is, or may be, a “foreign person” as defined by FIRPTA:
Buyer Responsibilities Under FIRPTA. If the transaction may be subject to FIRPTA, under certain circumstances, the buyer will become the “withholding agent” and be responsible for withholding seller’s tax and transmitting it to the IRS (“Withholding Requirement”). The failure to do so can result in buyer being held liable for the funds. For this reason, prior to closing, buyers must determine whether their seller is a “foreign person” under FIRPTA and subject to the Withholding Requirement. Seller’s and Buyer’s real estate agents are not FIRPTA experts, and cannot render legal or tax advice. The parties should secure expert advice from tax counsel, CPAs, or other experts before closing.
Working With Escrow. If the transaction will be subject to FIRPTA, the buyer and seller should so inform escrow to determine the extent to which it can assist with compliance, including handling the Withholding Requirement. If, due to company policy, escrow cannot participate in the FIRPTA-related portion of the closing, if necessary, seller and buyer should agree to move escrow to a title company that can do so, and the parties’ should equally share the cost of any cancellation fees, if applicable. If, due to moving escrow, the transaction cannot be timely closed by the Closing Date, unless the parties otherwise agree in writing, buyer’s earnest money deposit should be fully refunded, and the transaction shall be terminated.
If Seller Is A Foreign Person and Exempt From FIRPTA Withholding Requirement. If the seller is a “foreign person” as defined by FIRPTA, but is exempt from the Withholding Requirement because: (a) The sale price of the Property is not more than $300,000; and, (b) The Property will be occupied as a residence by Buyer who is an individual (or a member of Buyer’s family) for at least 50% of the number of days (excluding days the Property is vacant) during each of the first two 12-month periods following the date of Closing. Buyer should sign an agreement warranting to the seller that buyer intends to occupy the property in accordance with this exemption. Buyer and seller should thereafter agree to cooperate with each other and Escrow, by signing such documents reasonably required to close this transaction.
If Seller Is A Foreign Person and Not Exempt From FIRPTA Withholding Requirement. Seller and Buyer should agree to cooperate with escrow in closing the transaction in accordance with the FIRPTA laws, including the Withholding Requirement.
If Seller Is Not A Foreign Person. If seller declares that they are not a “foreign person”, seller should, upon request, sign a Certificate of Non-Foreign Status (“Certificate”), which will include disclosure of Buyer’s taxpayer identification number, social security number, or employer identification number (collectively “Nonpublic Personal Information” or “NPI”). The original Certificate should either be held by Escrow, serving as a “Qualified Substitute” under FIRPTA, or alternatively, Buyer should hold the original Certificate in such capacity. In such event, Buyer should covenant and agree not to disclose Seller’s NPI to any third parties unless required to do so by subpoena or court order. Where applicable, Buyer should agree to retain the Certificate until the end of the fifth (5th) taxable year following the taxable year in which the transaction is closed, and during said time to make it available to the IRS upon lawful request.
If, for any reason, Seller fails or refuses to sign the Certificate at Closing, Buyer should terminate the transaction and obtain a refund of all Deposits paid to Escrow, but preserve any legal remedies available against Buyer under the Sale Agreement (e.g. specific performance). ~PCQ