R: FIRPTA: AGENT LIABILIY
FIRPTA: AGENT LIABILITY
The purpose of the FIRPTA is to tell the buyer that seller is exempt from withholding both federal and California withholding requirements. IRS Section 1445; California Revenue & Taxation Code Section 18662.
- When is a FIRPTA required to be given to a Buyer?
FIRPTA is required anytime a seller is claiming an exemption from federal and/or California withholding from proceeds of the sale of real property.
The FIRPTA must include seller’s social security or taxpayer identification number and must be delivered directly to the buyer or to a “qualified substitute.”
2. Can Seller “Block Out” his Social Security Number and give the FIRPTA to the Buyer?
No. The FIRPTA must be completed. An incomplete FIRPTA is the same an no delivery. It is also ineffective for the listing agent to deliver a FIRPTA with information “blocked out” on the form.
Neither buyers, nor their agents should accept a FIRPTA with the social security number “blocked out.”
3. What is a Qualified Substitute?
IRS Code Section 1445(b) requires that seller:
(a) provide this affidavit to the buyer with the seller’s taxpayer identification number (“TIN”) or (b) provide this affidavit, with TIN, to a “qualified substitute” who furnishes a statement to the buyer under penalty of perjury that the qualified substitute has such affidavit in their possession.”
Given the realistic concerns about identity theft, many sellers do not want to give the FIRPTA directly to the buyer. The code authorizes the seller to deliver the form to a “qualified substitute” instead.
A qualified substitute is either an “attorney, title company or escrow company responsible for closing the transaction, or directly to “Buyer’s agent.” No other parties can be a “qualified substitute.”
- What is the “Qualified Substitute” required to give to the Buyer?
A “qualified substitute” must give buyer a signed statement under penalty of perjury that they have received the FIRPTA and that the FIRPTA contains that following information: seller’s name, telephone number, address and social security number (the “Affidavit”).
A “qualified substitute” that falsely represents that he has a complete FIRPTA can be liable for damages if the FIRPTA is incomplete.
A “qualified substitute” must confirm that the FIRPTA is complete prior to sending the Affidavit to the buyer.
5. Can the Agent be Liable for a false or fraudulent FIRPTA?
Yes. If the listing or selling agent knows or suspects that the FIRPTA contains false information, then the agent can be liable for the damages in the amount of the tax due.
However, the Code limits the agent’s exposure to the amount of commission received.
6. What if the Seller refuses to provide a complete FIRPTA to the Buyer?
Escrow has no option but to make the tax deduction from seller’s proceeds if the seller refuses to (1) deliver a (2) complete FIRPTA to the Buyer.
If I represented the buyer and received an incomplete FIRPTA, I would advise escrow in writing that the FIRPTA is incomplete and instruct escrow to withhold the tax. This is the only way you can protect your buyer.
7. Are there exemptions from FIRPTA?
Yes. The front and back of the FIRPTA list many of the exemptions. There are other exemptions that are not listed on the FIRPTA, but are available on the IRS website.
One of the most commonly overlooked exemptions is that for the sale of a residential property under $300,000 to a buyer who intends to occupy the property as his primary residence. There are many caveats, and the buyer must intend to live at the property more than half of the time during the first 12 months following close of escrow.
Seller should be advised to speak with their CPA concerning all tax questions.