IRS Code Section 1445

Art · Aug 2, 2005

I'm buying a week and the closing agent asked us to complete an Affidavit to the effect that we were not required to withhold 10% of the selling price because we, as buyers, meet certain criteria, and know that the seller is not subject to withholding. We know nothing about the sellers other than their names.

I took a look a the IRS code and it really seems like the key item is that the seller should first be completing an affidavit about being in the clear.

Anyone had an experience with this part of the IRS code? I've sold several weeks privately, and never had this come up about us or the people that bought our weeks.

Art

Dave M · Aug 2, 2005

You are correct. The regulations under §1445 of the IRC provide a sample format for the Seller's certification. You, as the transferee, must obtain the certification and retain it for five years. Failure to follow that procedure can obligate you to make the 10% withholding tax payment - in addition to what you pay at closing.

Thus, you should insist on getting the seller's certification required by §1445 before signing that document.

Alternatively (and acceptable), you should ascertain that the closing company will not close before getting such certification for you. My guess is that is the closing company's intent, even though they might not have adequately communicated the process to you.

BocaBum99 · Aug 2, 2005

This is a very onerous withholding tax code that was really meant to enable the IRS to collect capital gains taxes for non-US citizens who profit from real estate investments. As we all know, almost all of the timeshares bought from a developer sustain a huge capital loss. So, for the vast majority of cases, this code is a tremendous nuisance.

It is such a nuisance, that most brokers and timeshare closing companies completely ignore it and will kill a deal if you raise their attention to it.

At the end of the day, it's the buyer who has the obligation to ensure that the proper paperwork is filed. If someone is getting a great deal on the purchase of a US timeshare from a non-US citizen, requiring that the seller jump through these hoops will with high probability result in them cancelling the deal with you and going elsewhere to find another buyer who doesn't know the rules.

The seller has to complete affidavits and get a US tax id. That is a royal pain for most international sellers who simply want to dump their timeshares.

Closing agencies who also close title on standard real estate transactions will follow the IRS rules to the letter. The entire transaction is as costly or more costly from a time and money perspective as a $1M single family home transaction.

Very painful. Very, Very painful.

BocaBum99 · Aug 2, 2005

Also, try explaining to an international seller why they have to go to the US Embassy in their country to get an acceptible notarization of their deed. Talk about killing a deal.

Interestingly, lots of deals go through without this requirement. But, occasionally, it will get rejected when the notary is not recognized by the state and country where your timeshare is located.

International deals have a lot of potential pitfalls that most timesharers ignore or not educated in. In this case, ignorance is very bliss.

Art · Aug 2, 2005

At this point, the affidavit issue has been raised by the closing company so I have no way of ignoring it.

No information has been provided as to whether the sellers are non-US citizens or not. They could be residents of Lexington, MA or Boca Raton, FL for all I know

Sure hope they are!

Anyway, thank you both for confirming my suspicion that we should be better informed about our sellers before we sign the affidavit.

Art

sfwilshire · Aug 2, 2005

How long has this requirement been around? Nothing was mentioned about it when I bought a week from a citizen of Mexico in 1996. Surely I'm in the clear after nine years?

Sheila

BocaBum99 · Aug 2, 2005

sfwilshire said:
How long has this requirement been around? Nothing was mentioned about it when I bought a week from a citizen of Mexico in 1996. Surely I'm in the clear after nine years?

Sheila

Dave M would know for sure, but I'll bet the statute of limitations is 5 or 7 years.

Art · Aug 2, 2005

Problem Solved

Just veriifed that unfortunately for them, my sellers are not US citizens.

They are going to have to jump through all the hoops that were described. The closing agent is going to send me a copy of the seller's certification.

Apparently, that wasn't sent to me originally because someone thought that anything other than the sellers' names was confidential information.

Art

Dave M · Aug 2, 2005

sfwilshire said:
Surely I'm in the clear after nine years?

You should be.

As I stated in my earlier post, you must retain the documentation for five years. Thus, after five years, your response to IRS would likely be, "I can't remember for sure, but I would have thrown the documentation away after five years."

BocaBum99 · Aug 2, 2005

Art,

Depending on the sales price of your deal, sometimes it is better just to split the cost of the 10% withholding and bypass the paperwork. That paperwork is so onerous that I wouldn't be surprise if it cost you the deal.

Dave M · Aug 2, 2005

I'm not sure I understand, Boca.

If the 10% withholding isn't required, all the seller has to do is complete the simple affidavit I referred to in my first post in this thread. That might take all of ten minutes. In such a case, the seller must be a resident of the U.S. and likely already has a tax I.D. #.

If the seller lives outside the U.S., the 10% withholding will be required in almost every situation. If the 10% is required, the only paperwork required is the form that must be prepared for IRS. That form would still have to be completed with the 10% split.

(I am skipping the discussion of corporate sellers, for which there is a much more complex set of rules, if there are non-resident owners.)

Art · Aug 2, 2005

Did some more searching on the IRS 1445 site and found this:

"Exceptions from FIRPTA Withholding

You do not have to withhold if any of the following apply.

1. You (the transferee) acquire the property for use as a home and the amount realized (sales price) is not more than $300,000. You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant.

2. . . . . "

The above seems to be the basis for the closing agent's request to us to submit an affidavit that we are meeting the standards for not withholdiing 10% of the proceeds. Since we are buying the week to use, we will meet the residency requirement and would appear to be off the hook as far as the IRS is concerned. Whether it eliminates hoop jumping for the seller I cannot guess.

BTW, since the phrasing is "reside," rather than "use," the purchase of a week to use as a trader really becomes a gray area.

Art

BocaBum99 · Aug 2, 2005

Dave M said:
I'm not sure I understand, Boca.

If the 10% withholding isn't required, all the seller has to do is complete the simple affidavit I referred to in my first post in this thread. That might take all of ten minutes. In such a case, the seller must be a resident of the U.S. and likely already has a tax I.D. #.

If the seller lives outside the U.S., the 10% withholding will be required in almost every situation. If the 10% is required, the only paperwork required is the form that must be prepared for IRS. That form would still have to be completed with the 10% split.

(I am skipping the discussion of corporate sellers, for which there is a much more complex set of rules, if there are non-resident owners.)

Let's say you buy a timeshare for $1000 from a person from Australia. Rather than doing any paperwork, just send the IRS the $100. The buyer pays $50, The seller pays $50.

No tax forms, no tax ids, no affidavits. Just pay the withholding tax. The form to pay the tax is FAR easier than the form to get the 10% back.

Dave M · Aug 2, 2005

I believe the affidavit, using the model in the regulations, is far easier than the Form 8288 (and the required 8288A attachment) for paying the tax. The form 8288 has five pages of instructions in typical IRS small print!

The affidavit consists of four canned sentences and simple fill-in-the-blanks for I.D. # and U.S. address. That's it.

Since it's so simple, why pay the tax if it isn't due?

BocaBum99 · Aug 3, 2005

Dave M said:
I believe the affidavit, using the model in the regulations, is far easier than the Form 8288 (and the required 8288A attachment) for paying the tax. The form 8288 has five pages of instructions in typical IRS small print!

The affidavit consists of four canned sentences and simple fill-in-the-blanks for I.D. # and U.S. address. That's it.

Since it's so simple, why pay the tax if it isn't due?

Because someone who is selling their timeshare for $1000 is very intimidated by the 5 page form. They read all about having to file a tax return and the issues related to filing the forms. You spend hours and days trying to calm them down about this. Then, they find out they need a US tax id. That usually kills it.

If we pay the withholding that isn't due, at least I can control the paperwork. I take it out of the sellers hands. Sometimes, it's easier to split the $100 fee than calm the seller down about the paperwork.

What if the seller doesn't speak good English? How do you explain the 5-page form? If the amount is low enough, it's easier to split the withholding tax.

Dave M · Aug 3, 2005

I think there may be a misunderstanding here or you may be referring to an unusual set of circumstances.

You propose paying the tax. Yet you want to avoid the five pages of complexity. You can't have both. If you elect to withhold and pay the tax, that's what you're dealing with - the complexity of filing with the IRS.

However, preparing the simple affidavit - assuming the seller qualifies - avoids all of that!

Someone who is a full-time U.S. resident likely has a Social Security number, certainly if the individual has ever worked in the U.S. or has investments in the U.S. That would seem to cover most people who live in the U.S. and own a U.S. timeshare. For all of those people, completing the four-sentence affidavit and avoiding complex IRS forms would seem to be very simple.

I'm guessing you have had an unpleasant experience with the withholding issue. If so, my guess is that you dealt with someone who didn't know the rules well enough to avoid the complexity that concerns you. As a CPA, I have worked with these rules for over 35 years. I have yet to see a situation where a deal fell through if the seller was eligible to avoid withholding by giving the buyer the affidavit. A knowledgeable closing company can make the process almost invisible for the seller. Eligibility is the key because - as stated earlier - not everyone is eligible.

BocaBum99 · Aug 3, 2005

Dave M said:
I think there may be a misunderstanding here or you may be referring to an unusual set of circumstances.

You propose paying the tax. Yet you want to avoid the five pages of complexity. You can't have both. If you elect to withhold and pay the tax, that's what you're dealing with - the complexity of filing with the IRS.

However, preparing the simple affidavit - assuming the seller qualifies - avoids all of that!

Someone who is a full-time U.S. resident likely has a Social Security number, certainly if the individual has ever worked in the U.S. or has investments in the U.S. That would seem to cover most people who live in the U.S. and own a U.S. timeshare. For all of those people, completing the four-sentence affidavit and avoiding complex IRS forms would seem to be very simple.

I'm guessing you have had an unpleasant experience with the withholding issue. If so, my guess is that you dealt with someone who didn't know the rules well enough to avoid the complexity that concerns you. As a CPA, I have worked with these rules for over 35 years. I have yet to see a situation where a deal fell through if the seller was eligible to avoid withholding by giving the buyer the affidavit. A knowledgeable closing company can make the process almost invisible for the seller. Eligibility is the key because - as stated earlier - not everyone is eligible.

Dave,

I'm not talking about a US citizen. I am talking about a seller who doesn't speak good English from a foreign country who is dumping their timeshare because they don't want to pay the MF anymore. Of course a 35-year CPA veteran would find it easy to do.

If you poll brokers and timeshare closing companies, I think you will find that they a) intentionally hide the withholding requirement or b) will reject the deal from anyone who raises it. Many closing companies don't know about it. The title agencies do. Heck most Tuggers don't know that there is an issue.

Dave M · Aug 3, 2005

Okay. My last try. Then I give up. Three situations, the last of which approximates your example. In all cases, as we have both stated, we are referring to non-U.S. citizens.

1) Foreign resident: The withholding applies. Generally, there is no way around it.

2) U.S. resident who has a Social Security # because he/she has either worked in the U.S. or owns investments here that require obtaining such a number: The four-sentence affidavit is simple. No withholding. No complexity. No IRS forms. Nothing to be concerned about.

3) Your less frequent situation where an individual is a full-time U.S. resident, owns a U.S. (not foreign) timeshare, doesn't have a Social Security # and doesn't have a closing agent that is familiar with how easy it is to comply with the paperwork: Yep. That seller is either going to disappear or be subject to the withholding. Or the buyer may be stuck for five years with the potential withholding liability.

jaysue · Mar 23, 2006

Does anyone have any experience with trying to get an exemption

I am a Canadian citizen looking to sell certain Vero Beach DVC holdings that I have not made a profit on (small loss in US$ magnifed in C$ by strenght in C$ currency)

Since I have no actual gain on the disposition, I was wondering if there was an exemption of some type I can use or rely on

Cheers
jaysue

Dave M · Mar 23, 2006

Unfortunately, the withholding tax is based on the selling price and has nothing to do wiith whether there is a gain. You have to file a tax return to show no gain and request a refund.

See this thread and this one for further discussion of the topic as it applies to you.

IRS Code Section 1445

Art

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