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How to file a tax addendum

By David deForrest

General Manager

The settlement agent handling my purchase wants me to execute a "FIRPTA" affidavit. What is this about?

FIRPTA is short for "Foreign Investment in Real Property Tax Act" (26 U.S.C. § 1445) the purpose of which is to collect taxes due on sale of real estate owned by foreign individuals or entities which do not pay US taxes. Since in cases where the Seller is not a US Resident or Corporation, it is obviously hard for the IRS to be sure it will ever actually collect any taxes due on capital gains realized in the sale, the ACT imposes a duty on the Buyer either to establish that the Seller is a qualified US taxpayer or to withhold 10% of the sale proceeds and turn it over to the IRS. Obviously, some foreign Sellers hate this since they may well not owe any tax on a sale (or may even desire to evade the collection of any taxes owed), but find themselves being told they

need to file a tax return with the IRS just to get their 10% back (much later). And if they have substantial debt on the property, the 10% withheld may even exceed the cash available to Seller.

Happily, as in so many tax-related matters, Congress has supplied a loophole. There is an exemption to the Buyer's requirement to withhold 10% of the purchase price of property if the Buyer (not the Seller) can certify that he/she will meet the following conditions:

As you can see, this loophole is big enough to drive a bus through. After all, without trying to be too cynical, people's "definite plans" have been known to change, often as they leave the closing table and re-think their situation. I leave the interpretation of this to others. However, when a Buyer is asked to execute a FIRPTA addendum he or she is, therefore, being asked to sign a document indicating that his/her transaction meets the two conditions given above. For a further analysis and overview of FIRPTA, link here.

Category: Taxes

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