FIRPTA affidavit: Overview, definition, and example
What is a FIRPTA affidavit?
A FIRPTA affidavit is a document used to confirm compliance with the foreign investment in real property tax act (FIRPTA). FIRPTA is a U.S. tax law that imposes tax obligations on foreign investors selling U.S. real property interests. The FIRPTA affidavit is typically executed by the seller of a U.S. real property interest and is used to certify whether the seller is a foreign person or entity.
The primary purpose of the FIRPTA affidavit is to determine whether the buyer is required to withhold a portion of the sale proceeds for tax purposes. If the seller is a foreign person, the buyer is typically required to withhold 15% of the sale price and remit it to the Internal Revenue Service (IRS). The FIRPTA affidavit helps the buyer and seller navigate this requirement by providing a declaration of the seller's status.
Why is a FIRPTA affidavit important?
A FIRPTA affidavit is important because it ensures compliance with the U.S. tax code when foreign investors are involved in the sale of U.S. real estate. The affidavit protects the buyer by confirming whether the seller is a foreign national or entity, thereby determining if withholding is necessary to meet U.S. tax obligations.
For the seller, executing a FIRPTA affidavit can help avoid delays in the transaction and provide clarification on any potential withholding taxes. It also helps maintain transparency in real estate transactions involving foreign parties, ensuring that tax laws are followed correctly.
Understanding the FIRPTA affidavit through an example
Imagine a Canadian citizen who owns a vacation home in Florida and decides to sell it. The buyer, an American citizen, must comply with FIRPTA regulations and potentially withhold 15% of the sale price if the seller is considered a foreign person. To confirm the seller's foreign status, the seller submits a FIRPTA affidavit.
In this case, the Canadian seller declares in the affidavit that they are not a U.S. person, and the buyer uses this affidavit to determine the amount of withholding tax they must remit to the IRS. If the seller were a U.S. citizen or a U.S.-based entity, the affidavit would confirm that no withholding is required.
An example of a FIRPTA affidavit clause
Here’s how a FIRPTA affidavit clause might appear in a real estate transaction agreement:
"Seller hereby certifies that they are not a foreign person, as defined by the Foreign Investment in Real Property Tax Act (FIRPTA). Seller further agrees to provide the Buyer with a signed FIRPTA affidavit confirming their status as either a U.S. or foreign person, in compliance with FIRPTA tax withholding requirements."
Conclusion
A FIRPTA affidavit is a key document in real estate transactions involving foreign sellers. It helps ensure that the buyer complies with U.S. tax regulations by confirming the seller's foreign status and determining if withholding is necessary. For both buyers and sellers, understanding the FIRPTA affidavit helps prevent delays, ensures tax compliance, and clarifies the financial obligations related to the sale of U.S. real estate interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.