One of the most common questions Notary2Pro founder Carol Ray would receive from graduates before, during, and after signings was regarding the “Affidavit of Non-Foreign Status” document. This document can also be referred to as a Foreign Investment in Real Property Tax Act (FIRPTA).
This document shows up in a Seller’s package. The Internal Revenue Service (IRS) designed the tax document to confirm whether or not the seller of a property is either a U.S. citizen or has the status of a foreign resident. While some non-U.S. residents avoid paying taxes on certain capital gains, the rule does not extend to the sale of U.S. real estate. Escrow officers are required to withhold 10-15% of the purchase price of a property for any person or entity that sells a property in the United States with a foreign status. Once the IRS determines and collects the required taxes, the remaining funds release to the seller, and the file can close. The withholding tax can be thought of as a security deposit rather than a tax due. The foreign seller is required to submit the withholding tax to ensure the foreign seller will pay the tax to the IRS.
It’s important to note, that if the seller is a foreign person and there is no withholding, then the IRS points a finger at the buyer and makes the buyer responsible for paying the withholding taxes. The most important section of this document is section 4 of this example. If the seller leaves this blank and doesn’t put in their social security number, the form is worthless and it won’t protect the IRS from going after the buyer. There must be a separate form for each seller in the transaction.
In more detailed terms, The IRS requires 15% of the sales price be withheld on the sale of United States real property interests by foreign persons (on sales above $1,000,000), and either 15% or 10% on sales between $300,001 and $1,000,0000, and either 15% or $0 for sales of $300,000 and under. The lower withholding amount at both levels requires the buyer to purchase the property with the intent to use it as a residence. For sales of $300,000 or less, on some occasions, the foreign seller will not owe any withholding tax to the IRS. In these instances, the foreign seller may still owe income tax on the sale, but the IRS is trusting the foreign seller to send in the actual tax owed, and not requiring the foreign seller to send in the refundable withholding tax at closing.
A nonresident alien (a foreign individual); a foreign corporation; a foreign partnership; a foreign trust; and a foreign estate are all subject to withholding and deemed foreign parties by the IRS. Students are considered a special category. For specific details, always consult with a tax professional.
Understanding the Affidavit of Non-Foreign Status is crucial for various financial and legal transactions. Whether you’re a notary public seeking to enhance your expertise or an individual navigating the complexities of this document, Notary2Pro is your go-to resource. Our comprehensive course offers in-depth guidance on handling the Affidavit of Non-Foreign Status and other essential notarial acts. For a more in-depth understanding and to explore our exclusive content, visit the Notary2Pro website.
Additionally, we have included pictures of what these forms look like to provide you with a visual reference for your notarial endeavors.
For official information from the IRS, you can also visit their website using this link: https://www.irs.gov/instructions/i8288.