Lately I have been given a lot of incomplete FIRPTAs from listing agents in & near Silicon Valley with the request (or demand) that my buyers sign them. They explain “we don’t have to provide the social to the buyers anymore”. These well intentioned agents have mixed up two choices and provided something of a hybrid that cannot be used to satisfy the requirement of the form. Hence this post.
It’s not just happening to me and to my buyers. There’s an immense amount of confusion about how to properly complete and handle the FIRPTA form in California real estate sales. Most of it would be solved if people (buyers, sellers, realty agents, transaction coordinators and brokers) would simply read it and not assume what the requirements are. (Silicon Valley Realtors have long heard local real estate trainer Guy Berry admonish us in class to simply read the forms. He scrawls in large letters on the board for his class on the purchase agreement: What does the contract really say?)
So let’s do that. Let’s see what the Seller’s Affidavit of Nonforeign Status And/Or California Withholding Exemption really says. To begin with, I uploaded the 2 page FIRPTA document onto my Valley of Hearts Delight website, so you can access the entire document by clicking on the link (it will download into a new window – it’s a pdf). You might be surprised, especially if you are taking your information second-hand and have not read this form yourself in the last two years. (And if in doubt about any of it, please contact a real estate attorney for clarification.)
What is the purpose of the Seller’s Affidavit or FIRPTA?
Internal Revenue Code (“IRC”) Section 1445 provides that a transferee (buyer) of U.S. real property interest must withhold tax if the transferor (seller) is a “foreign person”. California Revenue and Taxation Code Section 18662 provides that a transferee (buyer) of a California real property interest must withhold tax unless an exemption applies.
So for starters, we are told that buyers must withhold tax from the sellers unless an exemption applies when they buy real estate in California. That’s what this FIRPTA form is all about: it tells the buyer that there is an exemption. By completing this form and providing it, the seller is giving an affidavit that he or she is not subject to the withholding tax for either the Federal Government or for the State of California. The buyer is off the hook for holding money back in escrow from the seller.
In case the seller doesn’t already understand how serious this requirement is, the next line in the form continues with underscoring its gravity. It’s the seller’s form, so “I” refers back to the seller (or transferor).
I understand that this affidavit may be disclosed to the Internal Revenue Service and to the California Tax Board by the transferee, and that any false statement I have made herein may result in a fine, imprisonment or both (bold is mine, not original).
I think that makes it pretty clear that the FIRPTA should be treated carefully. Unfortunately, that’s often not the case.
What information must be provided on the FIRPTA?
The next section has a few areas which are required to be completed by the seller (none is said to be optional).
- The address of the property being transferred (or sold)
- The seller or transferor’s information:
- Full name
- Telephone number
- Social Security Number, Federal Employer Identification Number, or California Corporation Number
It is usually the fourth item which is not provided when agents or sellers balk at this requirement but many times they also do not want to provide their telephone number either if this is being given to the buyer.
Does this completed FIRPTA, with Social Security Number, have to be given by the home seller to the home buyer?
Luckily, the next few words provide relief from the panic that sets in when sellers, who are rightly worried about identity theft, realize that the law says that they must give their personal information to the buyer of their home. The bolding is in the original document, not just for emphasis here. Read on:
Note: In order to avoid withholding, IRC Section 1445(b) requires that the Seller (a) provides this affidavit to the buyer with the Seller’s taxpayer identification number (“TIN”) or (b) provides this affidavit, with TIN, to a “qualified substitute” who furnishes a statement to the buyer under penalty of perjury that the qualified substitute has such affidavit in their possession. A qualified substitute may be (i) an attorney, title company or escrow company (but not the Seller’s agent) responsible for closing the transaction, or (ii) the Buyer’s agent.
This is good news for sellers. While the FIRPTA form still MUST BE COMPLETED, it can now be given to the title or escrow company (or an attorney, if that attorney is handling the closing). So to recap, here are the choices:
- The completed FIRPTA may be given to the buyer OR
- The completed FIRPTA may be given to the closing agent which acts as a “qualified substitute” (title company, escrow company, attorney or buyer’s agent) and the qualified substitute in turn gives a document to the buyer gives the buyer a statement saying that the completed FIRPTA is in its or their possession
The statement by the qualified substitute does NOT provide the personal information directly to the buyer, so this is by far the choice most sellers and agents prefer.
Near the bottom of the page, in huge type font, is an admonishment to the buyer, if the affidavit is given to him or her, to not misuse the TIN or SSN.
Buyer’s unauthorized use or disclosure of Seller’s TIN could result in civil or criminal liability.
Some real estate agents (and offices or even whole brokerages) sometimes deliver the FIRPTA to the buyer or buyer’s agent with the key info blacked out, whited out or missing, and demand that the buyers sign it. Buyers cannot do that. Under the signature line, it states
(Buyer acknowledges receipt of a copy of Seller’s affidavit.)
This first page of the Seller’s affidavit is not complete unless the personal information is included (there are check boxes to be selected also, but as these are not a source of confusion or contention I will omit them from this discussion).
Remember, if the seller should pay the withholding tax but doesn’t, the only protection a buyer has is this completed form.
- The FIRPTA must always be completed if the seller asserts that no withholding should be kept to pay taxes
- The completed FIRPTA may be given to the buyer but it is not required IF a statement of qualified substitute is provided by the person or entity in possession of the completed FIRPTA to the buyer
- It is a fairly common mistake for listing agents to give the buyer a FIRPTA with sensitive information blocked out or omitted, but this is a confusion between the two options and does not satisfy the requirement of the form
What does the qualified substitute tell the buyer about the seller?
Not much. Some title companies draft their own forms, but California Realtors have access to the CAR forms online and may use Form QS (sample at link, which takes you to a pdf of the qualified substitute form.)
A word about qualified substitutes in California
In northern California, typically a title company handles the escrow functions. (In southern CA, often there’s a separate escrow company, which sometimes is owned by a real estate firm involved in the transaction.) Many title companies are willing to be the qualified substitute and to receive the completed FIRPTA and provide a statement to the buyer that they have it. But not all title companies are willing to do this. The California Association of Realtors keeps a list of which companies will do it and you can find it on the CAR website: FIRPTA Qualified Substitute Service.
What are the exemptions to using the Seller’s Affidavit?
There are a number of reasons why it may be legitimate to skip this form altogether:
- The seller is a foreign person and the withholding tax must be paid
- The sale is less than $300,000 and the buyer intends to use it for personal use (with some caveats)
- The back of the Seller’s Affidavit (link above for full document, on page 2) provides explanations of exemptions
- Other exemptions listed on the IRS website
What if the seller refuses to provide a completed FIRPTA to the buyer or qualified substitute when it is required? Or if the buyer knows the information on the Seller’s Affidavit to be false?
The IRS website (see link above) states:
The certifications in items (3) and (4) are not effective if you have actual knowledge, or receive a notice from an agent, that they are false. If you are required by regulations to furnish a copy of the certification to the IRS and you fail to do so in the time and manner prescribed, the certifications are not effective.
In other words, you may have to withhold the money due to the federal and state government, or you may owe this money yourself if you are the buyer. Please consult an attorney!
What is the liability of the real estate agent if the FIRPTA is false and the agent knows it?
The IRS discusses this, too, on the same page as above. The agent may be liable for the withholding tax too, but the damage is capped at the amount of commission paid. This next small paragraph is addressed to buyers:
If you receive either of the certifications discussed in item (3) or (4) and the transferor’s agent or your agent (the transferee’s agent) has actual knowledge that the certification is false, or in the case of (3), that the corporation is a foreign corporation, the agent must notify you, or the agent will be held liable for the tax. The agent’s liability is limited to the amount of pay the agent gets from the transaction.
So if you, the buyer, or your real estate agent, knows that the FIRPTA is not on the level, you may be liable for the taxes due. Please seek the help of a good lawyer immediately!
Before signing the Seller’s Affidavit or any other form, Silicon Valley home buyers & home sellers should read and understand what they are being asked to sign. Take your time and do it! It is very risky to breeze through this, just as much as it is to rush and be incomplete with the contract or disclosures. Be wise and be careful.
Other issues: Broker Policies and Agent Practice
Sometimes a brokerage will have a very clear policy about the qualified substitute, but particular offices or agents may ignore it. For example, a large, local brokerage with a fine reputation is Alain Pinel, Realtors. They have a document for their agents explaining how the FIRPTA and qualified substitute is to work – and it’s correct. But this year I closed a transaction with a very pleasant APR agent who had no comprehension of this form. It took me many emails with links and explanations to try to get across what should have been known already from within the brokerage.
Disclaimer: this post is not intended to be legal advice. Please contact a qualified legal professional if you seek legal advice.
For further reading on the FIRPTA form and laws:
Definitions of Terms and Procedures Unique to FIRPTA (IRS website)
Federal Withholding: Foreign Investment In Real Property Tax Act (article on CAR site)
FIRPTA for Real Estate Investors, Brokers and Agents (article on About.com by Jim Kimmons)