FIRPTA Basics and Notice to Sellers and Buyers(Updated with February, 2016 Changed Requirements)

• The most common exemption is that the Sellers declare that they are not “foreign persons.”   (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 Sellers’ 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 Sellers’ Affidavit WITH THEIR Social Security Numbers (SSN’s) within the time specified in 14.A.  Then, paragraph 20.B, Escrow Instructions, requires the Escrowholder to provide its “Qualified Substitute Statement” (QSS) to the Buyers.

• The Seller Affidavit, in order to be valid for FIRPTA, must:  (1) be signed by each seller, under penalty of perjury; and (2) CONTAIN THE SELLERS’ SOCIAL SECURITY NUMBERS (or the Taxpayer ID number for entities).  A Seller Affidavit without a Seller’s SSN is WORTHLESS.

• BUYERS’ AGENT should let escrow and Sellers know that, if Sellers are relying on the exemption that they are not a foreign person, then:

• Sellers must sign the Seller Affidavit of Non-Foreign Status WITH THEIR SOCIAL SECURITY NUMBERS (or a TIN for entities).

• Sellers must give their Seller’s 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 QSS.

• PRIOR TO COE, the Buyers should either have: (1) the Sellers’ Affidavit of Non-Foreign Status, (again, not likely); or (2) the escrow’s QSS on EVERY sale.

• It is up to Buyers and Buyers’ agent to insist that Sellers, their agents and escrowholder comply with FIRPTA, and follow through with compliance.

• If a Seller refuses to comply, Buyers’ Agent, with Buyers’ approval, can 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, see the CAR Legal Memo on FIRPTA at:

http://www.car.org/legal/taxfolder/federal-withhold-foreign-invest/

 PRACTICE TIPS:

1.  Give the following “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 agent, if  a Seller and listing agent do not understand their FIRPTA obligations, you can provide a copy to the listing agent and Seller.

2. If the CAR Purchase Agreement is used, unless another exemption applies, the Seller is obligated to deliver Seller’s Affidavit to escrow within the time specified in 14.A. 

A.  Either the listing agent or the escrowholder should obtain this information upon contract ratification.

B. If the Seller’s Affidavit is not delivered to escrow, Buyer can deliver a “Notice to Seller to Perform.”

C.  Buyer Agents should remind Escrow of escrow’s obligation, pursuant to Paragraph 20.B, Escrow Instructions, to provide their QSS to the Buyer. 

3.  Prior to the close of escrow, EVERY Buyer on EVERY sale should have either:  (1) the Seller’s Affidavit of Non-Foreign Status WITH SELLER’S SOCIAL SECURITY NUMBER (however, not likely); or (2) the escrow’s QSS.

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 2016                                                           02/05/16

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 escrowholder completed FIRPTA Seller Affidavits (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 the escrow holder, and the escrowholder 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 escrowholder 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 escrowholder 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 Escrowholder’s Statement.

In the event the Sellers and/or the escrowholder still refuse to comply with A or B, above, your real estate broker in this transaction recommends that Buyer seek legal advice concerning his/her legal rights before proceeding.  If you decide to consummate your purchase without obtaining the required 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.

Date:    _____________________, 201___                Date:   __________________, 201___

Seller: _____________________________               Buyer: _________________________

Seller: _____________________________               Buyer: _________________________