Since the enactment of the Foreign Investment in Real Property Tax Act in 1980, the IRS has required that the transferor--seller--of a real property asset in the U.S. provide a Non-Foreign Affidavit to the transferee--buyer--of that property. The purpose of the affidavit is to state, under oath, that the seller is not a foreign person, or as defined by the act, a non-resident alien. The affidavit will also be used if the seller of the property is a corporation or partnership, to attest to its non-foreign, domestic status.
When the seller fails to provide the affidavit to the buyer, the buyer is required to withhold 10 percent of the purchase price from the final transaction. The buyer's escrow agent must then send the withheld 10 percent to the IRS.
What is an Affidavit?
An affidavit is a statement of fact, signed by the individual to which the affidavit pertains, and duly notorized by a lawyer or judicial officer. The contents of a sworn affidavit are treated as given under oath by the signatory. A sworn affidavit may be accepted as evidence by a court in place of actual testimony.
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The Foreign Investment in Real Property Tax Act, passed in 1980, was the U.S. government's attempt to stave off a growing trend in the ownership of U.S. farmland and other property concerns by foreign nationals and non-U.S. corporations. The act makes the investment in real property---and in shares of corporations which primarily consist of U.S. real estate---taxable, the buyer being required to send 10 percent of the gross purchase price to the IRS.
Exemptions from FIRPTA
A person filing a non-foreign affidavit will be exempt from the withholding provision of the act. A foreign person for the purposes of the act includes foreign corporations, foreign partnerships and non-resident aliens. However, a resident alien is not treated as a foreign person under FIRPTA.
In addition to non-foreign status exemptions, withholding is also not required where the purchase price of property is for less than $300,000 and the buyer is acquiring the property as a primary residence.
Penalty for Not Filing
A broker is required to establish whether the seller is in fact foreign in accordance with FIRPTA. Failure to do so and to properly withhold the amount required by the act can result in a fine. Fines imposed can equal the compensation received by the broker or, on some occasions, the amount of tax that was due from the transfer.
Penalties may also be imposed if a non-foreign affidavit is filed and the broker is aware of the seller's foreign status.
Completing the Affidavit
The form requires the seller to confirm his identity, the location and identification of the property being transferred, and his status as a non-foreign individual by providing a U.S. taxpayer identification number. The document must be signed and dated in front of a notary or other duly authorized officer of the court. The non-foreign affidavit should then be passed to the buyer to safeguard his position at completion of the sale.