Buyers Beware! You could hold the tax burden on behalf of the seller


Did you know that, as a buyer of real estate, if the seller of the home you wish to purchase is a foreign real estate investor, the U.S. government will place the burden of responsibility on you for paying taxes owed by the foreign investor?

In the majority of cases, the seller will usually be a U.S. citizen or permanent resident; in which case, you have nothing to worry about. In these days, however, not everyone is always forthright and upfront about their U.S residence status; therefore, it would be nice if we can be assured that the seller is not of foreign status. This is the reason for the declaration of non-foreign status (also known as FIRPTA.)

What is FIRPTA?

FIRPTA stands for “Foreign Investment Real Property Tax Act”. Essentially, if the seller of a home is a foreign “non-resident”, the U.S. government wants to ensure they receive taxes owed by the seller on the real estate transaction. The catch is however, that many foreign sellers do not pay their taxes owed to the U.S. government and since they are not resident in the U.S, the U.S. government often loses out on much ($$$) tax revenue.

So what did the U.S. government do?

With the seller being foreign, there is no easy way to “collect the taxes”; however, the U.S. government knows they can reach the buyer because the buyer is a U.S. resident/citizen. Therefore, in real estate transactions involving foreign non-resident sellers, the U.S. government places the burden of responsibility for paying taxes owed by the foreign seller onto the BUYER! Doesn’t seem fair, but the government will do what it needs to ensure it receives its taxes owed, even if this means placing the tax burden on the buyer!

How do we ensure that our buyer is not held liable; i.e. that the U.S. government does not try to collect seller taxes owed from the buyer?

Enter the FIRPTA Affidavit…

Put simply, the FIRPTA Affidavit is used to declare that the seller is of non-foreign status; i.e. the seller is essentially a legal U.S. Citizen or Green Card Holder. The affidavit is used to declare the legal resident status.

To prove this legal status however, the seller must provide their TIN or Social Security number on the FIRPTA affidavit and pass this form onto the buyer for their records… But wait! If I were a seller, I wouldn’t want my social security number to be given to a stranger (the buyer)… what now? How can the seller prove his/her legal residence, while at the same time, not have to disclose their personal SSN to the buyer?

This is where the Qualified Substitute (QS) comes in…

Essentially, the seller still needs to fill out the FIRPTA affidavit details with his SSN information, but instead of providing the affidavit to the buyer, the affidavit is presented directly to Escrow. Escrow becomes the “Qualified Substitute” responsible to inform the buyer (through the QS form) that the seller is indeed of non-foreign status (i.e. legal resident).

But that’s not where it ends… So far we’ve protected the seller from having to disclose their private SSN to the buyer, but the seller still ends up disclosing it to their Realtor when filling out the FIRPTA affidavit with their Realtor?

So how do we get past this final hurdle?

The answer is: Your Realtor should not be handling the FIRPTA Affidavit. Due to the sensitive nature of the seller’s SSN, no one, except your Escrow company should handle this document. Your Escrow officer will likely take care of the FIRPTA affidavit automatically for you and provide it to you through your Escrow Package; however, it would behoove yourself to validate it with your Realtor.

Seller Tip:

If your Realtor hands you a FIRPTA affidavit, do not sign it. Rather, request that the FIRPTA affidavit be handled solely between you and your Escrow officer.


David Anderson

David Anderson
CalBRE #02011749