These days, with identity theft stories almost a daily occurrence in the news media, people tend to be a lot more careful about giving out identification information such as social security numbers. Heightened concern about such matters has been the cause of more than a few glitches in real estate transactions. This is because of the requirements of the Foreign Investment in Real Property Tax Act, fondly known to those in the real estate business as FIRPTA.

Since 1985 FIRPTA has required that a buyer of real property in the United States must withhold 10 percent of the gross sales price and send it to the IRS if the seller is a "foreign person." For these purposes, a foreign person is a nonresident alien or a foreign corporation that has not made the election to be treated as a domestic corporation. A U.S. citizen is not a foreign person, nor is a resident alien who is the holder of a current "green card."

For the purposes of FIRPTA, in order to determine that a seller is not a foreign person, the seller must furnish the buyer with a "nonforeign affidavit" stating, under penalty of perjury, that the seller is not a foreign person. The affidavit must also include the seller’s taxpayer identification number – for most of us, our social security number.

For years this posed no problem. But, with increased concern about identity theft, sellers have become reluctant to provide buyers (and, thereby, the buyer’s agent, the agent’s transaction coordinator, and who knows who else) with that information. Some sellers have refused to do so. What happens then?

Well, one thing the buyer can do is elect to go ahead and close without the affidavit. If that is his or her choice, then the buyer should pray that the seller was not a foreign person and/or that there was no capital gain on the property. If the buyer’s prayers are not answered, and if the IRS gets involved, then the buyer will be liable for the capital gain tax due, or 10% of the purchase price, whichever is less. It has happened.

Another thing the buyer can do, in certain circumstances, is to provide an affidavit that the property will be owner occupied and that its purchase price is less than $300,000. That is a widely available option throughout much of the United States; but in many market areas, there are not a lot of transactions or properties that fit that description.

Fortunately, as a result of H.R. 3221 in 2008, there is another alternative as well. That is to use a qualified substitute. A qualified substitute may be an escrow company, a title company, or an attorney, as long as that entity is one of those responsible for closing the transaction. If the qualified substitute will provide a statement that he or she is in possession of the seller's tax identification number and an affidavit from the seller stating that he and/or she is not a foreign person, then the buyer is relieved of liability for the tax withholding. (All of this provided that neither the qualified substitute nor the buyer knows that the affidavit is false.)

Most sellers seem to be at least relatively comfortable giving their tax identification number to one of those entities. (Why they are less comfortable providing it to a real estate agent is a question I won't try to answer.) In many cases, it may have already been necessary for them to provide that information.

The California Association of Realtors (CAR) has created forms that may be used by the seller or by a qualified substitute, but the law doesn't require that a specific form be used. It just stipulates what information must be in the affidavit.

In transactions where the FIRPTA law might require withholding from the sales proceeds, buyers' agents want to be sure that the necessary information has been obtained. Their clients will appreciate it.

Published: December 13, 2011

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .