Seller Financing CA FTB Form 593 for the Buyer?
Real Estate Investor · Long Beach, CA · Member since 2011 · 3 posts · 1 vote
I'm purchasing a new rental property and the Seller has agreed to do an installment sale (seller financing). The escrow company just gave me a copy of Form 593 which appears to say that, as the BUYER, I must withhold a portion of any principal payment and instead send that directly to the CA Franchise Tax Board. This might make sense if I was the Seller, but the form is asking me to do this as the BUYER.
If I'm reading this correctly, it looks like it's telling me to effectively default on my note. I promised, let's say, to pay $500/month to the Seller. But if Form 593 tells me I need to withhold $10 from each payment (and send directly to the FTB), that means I'm only sending $490 to the Seller each month... and the Note I signed to the Seller says that if I don't pay them $500/month, they can take my property back. I feel like the CA FTB is forcing me to break my promise.
It's hard enough getting Sellers to agree to financing, but it seems REALLY wrong to me that I need to withhold money from the Seller for their taxes. That's not my business. Am I misunderstanding this form?
Thanks!
Kenny Wyland
I've never seen that form in a seller financing escrow and I've bought several that way. I'd consider having the seller/lender set up your payments with a servicer so that they can be the ones to do the payments to CA FTB. Let the seller/lender pay the $15-20/mo for servicing and let the servicer figure out which portion is principal v. interest. There's a ton of exemptions to the CA withholding, perhaps your seller meets one of those. Talk to your escrow officer!
Thanks for the reply, Kristine! I received the form from the Escrow officer, but they don't seem to really understand it. They know they need to give it to me, but not much beyond that. I tried calling other escrow companies to find another officer who might understand and they were all confused by it as well. They all assumed it was the Seller who needed to withhold and send to the FTB, not the Buyer. :/ I even called the Franchise Tax Board directly and the person on the phone didn't truly understand it. She had to keep putting me on hold to ask someone else and in the end, still couldn't tell me how much I actually need to pay.
The form instructions say your seller can "opt out" of the monthly withholding on an installment and file the gain on their annual tax return, So that's one option, but not one they'll necessarily go for. I'd call seller loans dot com or FCI Servicing. Both do servicing of seller financing loans in CA. Ask them if that's one of the additional services they provide as part of their monthly servicing. If they are processing CA withholding on installment sales, they can probably explain it. :)
Hi, Kenny:
Although I have not gone thru this before, I'll try to comment on this because I'm a tax professional (Enrolled Agent) and understand the tax code just a little bit better. For installment sale, the responsibility of withholding tilts toward the buyer side because the buyer is the one who "controls" the payment, not the seller. Codes have been written that the buyer is the party who is obligated to carry out this action of tax withholding. There will be penalties and interest if the buyer fails to follow. Even if the seller could "elect-out" and file for entire gain in his/her tax return and then request FTB to relieve the buyer from such duty of withholding, it is not practical to the buyer, in any way. So, for sure it's an installment sale, tell your accountant or tax pro that you need to file form 593, form 593-V and form 596-I on first payment, and try to obtain help from him/her. As for the seller, unless both of you can come to agreement, he/she usually does not have much choice but follow suit.
Suppose after the first or second installment payment, the seller "elect-out" and went ahead report the entire gain, which is less possible since the tax involved here would be higher, but then you'll know you did what you're supposed to in tax compliance and owes nothing to the State.
On the federal level, the buyer has a lot more pencil work to do. Buyer must report the entire transaction in the year of sale if it was for loss. He needs to consult his tax advisor.
So, for sure it's an installment sale, tell your accountant or tax pro that you need to file form 593, form 593-V and form 596-I on first payment, and try to obtain help from him/her.
This website makes it sound like the first payment is the difference between sales price and note, forms and withholding filed with FTB by escrow on behalf of buyer, not tax pro.
Hi, Kenny:
Although I have not gone thru this before, I'll try to comment on this because I'm a tax professional (Enrolled Agent) and understand the tax code just a little bit better. For installment sale, the responsibility of withholding tilts toward the buyer side because the buyer is the one who "controls" the payment, not the seller. Codes have been written that the buyer is the party who is obligated to carry out this action of tax withholding. There will be penalties and interest if the buyer fails to follow. Even if the seller could "elect-out" and file for entire gain in his/her tax return and then request FTB to relieve the buyer from such duty of withholding, it is not practical to the buyer, in any way. So, for sure it's an installment sale, tell your accountant or tax pro that you need to file form 593, form 593-V and form 596-I on first payment, and try to obtain help from him/her. As for the seller, unless both of you can come to agreement, he/she usually does not have much choice but follow suit.
Suppose after the first or second installment payment, the seller "elect-out" and went ahead report the entire gain, which is less possible since the tax involved here would be higher, but then you'll know you did what you're supposed to in tax compliance and owes nothing to the State.
On the federal level, the buyer has a lot more pencil work to do. Buyer must report the entire transaction in the year of sale if it was for loss. He needs to consult his tax advisor.