NOTE: The “Foreign Investment Real Property Tax Act” (“FIRPTA”) taxes foreign persons on the disposition of their U.S. real property interests. On September 14, 2020, the IRS announced an enforcement campaign to increase collection of taxes owed by foreign persons when disposing of U. S. Properties. This campaign is intended to increase FIRPTA voluntary compliance through issue-based examinations and external education and outreach.
It is up to Buyers and Buyers’ Agents to insist that Sellers, their Agents and Escrow Holder comply with FIRPTA, and follow through with compliance.
FIRPTA BASICS:
- FIRPTA applies to ALL sales of all types of properties unless an exemption applies.
- FIRPTA is the federal law that requires 15% of the gross sale price be paid to the IRS (or 10% if the gross sales price is $1,000,000 or less and the property is to be used as Buyer’s personal residence) unless an exemption applies. (California Withholding is the California law regarding 3-1/3 % to be paid to the Franchise Tax Board.)
- The most common exemption is that the Sellers declare that they are not “foreign persons” in a Seller Affidavit of Nonforeign Status (“Seller Affidavit”). See Paragraph 6 for details. (Other exemptions include a tax-deferred exchange; sale price is $300,000 or less and Buyer signs an affidavit that they will live in the property for two years after COE; IRS statement of no tax due, Seller 1031 Exchange with no boot.)
- Escrow has NO STATUTORY OBLIGATION to do anything regarding FIRPTA unless instructed to do so by Sellers, Buyers or their Agents. Under the law, Escrow can obtain the Seller Affidavit if they want to, but they have no obligation to do so.
- However, under the CAR Purchase Agreements, if the exemption from FIRPTA being relied upon is that the Sellers are not foreign persons, Sellers are obligated to provide to Escrow their Seller Affidavit WITH THEIR Social Security Numbers (SSN’s) within the time specified in 14.A. Then, paragraph 20.B, Escrow Instructions requires the Escrow Holder to provide its “Qualified Substitute Statement” (QS) to the Buyers.
NOTE: A real estate broker’s in-house Escrow (“Broker Escrow”) may NOT act as a Qualified Substitute, and may not issue a QS if that Broker’s Agent is representing the Seller in the sale transaction, either separately or as a dual Agent. While the law does allow a Broker Escrow to act as a Qualified Substitute if that Broker’s Agent is representing Buyer only, there are potential liability risks that should be assessed.
- The Seller Affidavit, in order to be valid for FIRPTA, must: (a) CONTAIN ALL SELLERS’ SOCIAL SECURITY NUMBERS (or the Taxpayer ID number for entities), and (b) be signed by each Seller, under penalty of perjury. A SELLER AFFIDAVIT WITHOUT EACH SELLER’S SSN IS WORTHLESS.
- BUYER’S AGENT should let Escrow and Sellers know if Sellers are relying on the exemption that they are not foreign persons, and then:
A. Sellers must sign the Seller Affidavit of Non-Foreign Status WITH THEIR SOCIAL SECURITY NUMBERS (or a TIN for entities).
B. Sellers must give their Seller Affidavit to either the Buyers (not likely because Sellers do not want to give Buyers their SSN’s), or to Escrow who then gives the Buyers their QS.
C. PRIOR TO COE, the Buyers should either have: (1) the fully-completed Seller Affidavit of Non-Foreign Status (again, not likely); or (2) the Escrow’s QS on EVERY sale.
D. If a Seller refuses to provide a Seller Affidavit with Seller’s SSN and Escrow Holder will not provide a QS, Buyers’ Agent, with Buyers’ approval, should put a demand into Escrow to send 15% or 10%, as appropriate, of the sales price to the IRS at COE. Sellers usually get the message at this point and choose to comply.
For more information on FIRPTA, see the CAR Legal Memo at: https://www.car.org/riskmanagement/qa/taxfolder/federal-withhold-foreign-invest
PRACTICE TIPS:
- BECAUSE THE IRS HAS A CAMPAIGN TO ENFORCE FIRPTA, IT IS IMPORTANT THAT AGENTS, ESPECIALLY BUYER’S AGENTS, FULLY COMPLY WITH FIRPTA PRIOR TO THE CLOSE OF ESCROW.
- Give the “Notice to Buyers and Sellers Regarding the Foreign Investor Real Property Tax Act” to your Buyers and/or Sellers at the beginning of each transaction to inform them of FIRPTA basics. There is no need to give it to the other side of the transaction. However, as a Buyer’s Agent, if a Seller and Seller’s Agent do not understand their FIRPTA obligations, you can provide a copy to the Seller’s Agent and Seller.
- If the CAR Purchase Agreement is used, unless another exemption applies, the Seller is obligated to deliver the Seller Affidavit to Escrow within the time specified in 14.A.
A. Either the Seller’s Agent or the Escrow Holder should obtain this information upon contract ratification.
B. If the Seller Affidavit is not delivered to Escrow, Buyer can deliver a “Notice to Seller to Perform.”
C. Buyer Agents should remind Escrow Holder of their obligation, pursuant to Paragraph 20.B, Escrow Instructions, to provide their QS to the Buyer.
- Prior to the Close of Escrow on every transaction where the Seller is relying on an exemption from FIRPTA based on Seller not being a foreign person, EVERY Buyer on EVERY sale should have either:
A. the Seller Affidavit of Non-Foreign Status WITH SELLER’S SOCIAL SECURITY NUMBER; or
B. the Escrow Holder’s QS; or
C. an instruction from Buyer to Escrow Holder to withhold the appropriate amount (10% or 15% of the Sale Price) from Seller’s proceeds and deliver that sum to the IRS; or,
D. a copy of an email or any other writing from the Buyer stating that Buyer has been advised to consult with their own qualified tax advisor and is not issuing such an instruction.
See also: “How to Handle Clients Who Will Not Follow Advice?” November 16, 2018
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their Agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2020 10/23/20
FORM FOLLOWS:
NOTICE TO BUYERS AND SELLERS REGARDING
FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA)
Under the Foreign Investment in Real Property Tax Act (FIRPTA), unless a Seller or the particular transaction is exempt, Buyers are legally obligated to withhold fifteen percent (15%) of the gross sales price otherwise payable to the Seller (or 10% if the gross sales price is $1,000,000 or less and the property is to be used as Buyer’s personal residence) and instruct Escrow to pay that amount to the IRS. While certain other exemptions may also apply, this Notice only discusses the most common exemption from FIRPTA: Seller signs an affidavit that Seller is not a “foreign person.”
Sellers are exempt if all Sellers give the Escrow Holder a completed FIRPTA Seller Affidavit of Nonforeign Status (California Association of REALTORS® (CAR) form AS, or title company equivalent), signed by all Sellers under penalty of perjury, which state that the Sellers are not nonresident aliens. FIRPTA requires that these Seller Affidavits include the taxpayer identification numbers of the Sellers (“TIN”). For individuals, this is Seller’s Social Security Number (“SSN”). This requirement is satisfied if the fully completed Sellers’ Affidavits are delivered to either (a) the Buyer, or (b) to the Escrow Holder, and the Escrow Holder in turn provides the Buyer with its statement that Escrow has received the legally-required Sellers’ Affidavits (the “Qualified Substitute Statement” or “QSS”).
ATTENTION SELLERS: If you, as the Sellers, are relying on the exemption that you are not nonresident aliens, you must provide either the Escrow Holder or the Buyer with completed Sellers’ Affidavits which includes your TIN’s or SSN’s.
ATTENTION BUYERS: If, after a request to do so, Sellers do not deliver their fully completed Seller Affidavits with their TIN’s or SSN’s, or the Escrow Holder does not deliver to you the required QSS, you should either: A. Instruct the Escrow company to withhold the appropriate percentage of the gross sales price of the property and pay that amount to the IRS for the tax account of the Sellers; or B. Instruct the Escrow company to delay the closing of Escrow for the transaction until you are provided with the required Escrow Holder’s Statement.
In the event the Sellers and/or the Escrow Holder still refuse to comply with A or B, above, your broker in this transaction recommends that you seek legal/tax advice concerning your legal rights before proceeding. If you decide to consummate your purchase without obtaining the required Seller Affidavit or a QSS, or without withholding the appropriate percentage of the gross sales price, then you have acted against the advice of your broker/agent, and may be liable to the IRS for any unpaid tax of a foreign Seller up to 15% or 10% as applicable, of the sale price, plus interest and penalties.
NOTE: This Notice is not intended to give tax or legal advice to Sellers or Buyers of real property. Sellers and Buyers are strongly advised to discuss any legal or tax issues related to this transaction with their respective legal and tax advisors; including the contents of this Notice, as to whether this transaction qualifies for an exemption, or whether Seller qualifies for an exemption, from the requirements of FIRPTA.
Seller/Buyer: __________________ __________________ Date: ________
Seller/Buyer: ____________________________ ________ Date: ________