Whenever you sell real property in the United States, the buyer will require you to sign a FIRPTA affidavit swearing that you are or are not a foreign person. FIRPTA refers to the Foreign Investment in Real Property Tax Act of 1980. Here is a link to a detailed explanation of FIRPTA from the Internal Revenue Service.
Why does a purchaser require the information as to whether or not you are a foreign person?
Because the IRS will charge the purchaser any tax that you, the seller, might owe if it goes unpaid.
But what does that have to do with being a foreign person? Well, the IRS doesn’t trust a foreign seller to pay any tax owed if the foreign seller takes the proceeds overseas after closing the sale.
This IRS concern gives rise to the dreaded “FIRPTA tax withholding” requirement. FIRPTA requires both parties to the sale, i.e., the purchaser as well as the seller, to account at the time of closing for any tax owed on the sales proceeds by the seller. Either the seller convinces the IRS ahead of the closing to grant an exemption from any tax or – more likely – the parties put 15% of the sales price into escrow until the seller gets the exemption or files their tax return.
And because the IRS will take its 15% from the purchaser if it isn’t put aside at the time of closing, the purchaser will do whatever it takes not to lose that money. Which means that the purchaser has two options. One: the purchaser gets an affidavit from the seller that the seller is not a foreign person subject to FIRPTA; Or two: the purchaser gets the seller to agree to put 15% of the sales proceeds aside at the closing, usually by giving it to the purchaser’s title insurance company to hold in escrow, until the seller takes care of the IRS by getting an exemption or filing a tax return and paying whatever tax is due.
So, this is why you need a FIRPTA affidavit when you sell real property in the US. Aren’t you glad you asked?
