Many Arizona home sellers are confused when asked to provide a Foreign Investment in Real Property Act Affidavit and many Arizona home buyers don't know they should ask for one. So what is a Foreign Investment in Real Property Act Affidavit, and why do Arizona real estate lawyers and title agents make sure such an affidavit is part of every Arizona real estate transaction?
The Foreign Investment in Real Property Tax Act of 1980, otherwise known as "FIRPTA," established Internal Revenue Code Section 897. This Section of the Internal Revenue Code applies to foreigners that sell real property in the United States. One of the requirements is that the Buyer of such real estate withhold a portion of the sales proceeds due to a foreign Seller and pay the required amount to the I.R.S. on behalf of the Seller.
In order to ensure compliance with the Code, the Buyer is deemed liable for the tax that must be deducted. In most cases Buyers have no way of knowing whether a Seller is a foreign individual subject to the tax. Thus, to avoid the withholding and the associated tax liability, a wise Buyer will ask the Seller to certify that the Seller is not a foreign person, even if the Buyer has no reason to believe the Seller is a foreign person.
A Buyer of Arizona real estate should always include a contract provision requiring the Seller to deliver a FIRPTA Affidavit and permitting the Buyer to withhold the proper amount at closing and pay it to the IRS if the Seller does not sign and deliver a FIRPTA Affidavit avowing that the Seller is not a foreign person as defined in Section 897.