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 California real estate escrows. 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 has 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 percent of the purchase price, whichever is less. It has happened.
The other thing the buyer can do is to instruct escrow to withhold the funds and send them on to the IRS. But this, of course, would require the seller's agreement. Or, the buyer could try going to court because the seller is in breach of contract (the standard real estate purchase contract says that the parties will comply with the requirements). None of those are very happy alternatives.
One solution that has been proposed, and tried, is to have the seller provide escrow with the social security number(s), instructing escrow to provide them only if the IRS comes calling, and to give the buyer an executed affidavit lacking the social security number(s). Maybe this is okay. Maybe not. The law, as enacted, does not entertain such an option. It neither authorizes it, nor prohibits it. It sounds like a reasonable compromise, but it does put the buyer at some risk -- namely, that it would not be allowed.
The California Association of Realtors® (CAR), through the National Association of Realtors® (NAR), has sought federal legislation that would authorize some version of the have-escrow-hold-it solution. Unfortunately, there was no bill to which it might have been attached in this session. Moreover, such legislation is not a high priority for NAR's federal legislative agenda. That is because this is largely a California issue.
Another way in which buyers can avoid the obligation to withhold 10 percent of the purchase price is for the buyer 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 most of these United States. But it has been a long time, with a statewide median sale price now over $550,000, since such an affidavit could have been submitted for a California real estate transaction. It is another burden of living in the Golden State.
