Foreign investors have long viewed the U.S. real estate market as a secure and profitable investment opportunity. Timeshares, in particular, provide a flexible way to own vacation property. However, when foreign owners decide to sell, they must navigate FIRPTA (Foreign Investment in Real Property Tax Act) regulations, which can directly affect the transaction process.
Understanding Timeshares
A timeshare is a shared vacation property arrangement where multiple individuals either own or lease the right to use the same property for designated periods. This model is commonly applied to vacation resorts, condominiums, apartments, and campgrounds. There are different types of timeshares:
- Fixed Terms: A fixed-period timeshare guarantees the same vacation week each year but offers little flexibility if schedules change.
- Floating Timeshares: A floating-period timeshare offers flexibility in selecting weeks within a set timeframe but requires early booking to secure preferred dates, especially during peak seasons.
- Points: The points system allows timeshare owners to use points for vacations at various resorts, offering flexibility but with varying value depending on property location, size, and season.
Timeshares may be appealing for vacationers, but they are still considered real estate, which makes sales of timeshares subject to FIRPTA.
FIRPTA and Timeshares: What You Need to Know
When a foreign owner sells a U.S. timeshare, FIRPTA requires the buyer to withhold 15% of the total sale price and remit it to the IRS, regardless of whether the seller makes a profit or loss.
How FIRPTA Affects Timeshare Transactions
- Even Timeshares Are Subject to FIRPTA
Many foreign sellers assume that timeshares are exempt from FIRPTA, but they are considered U.S. real property interests and subject to withholding just like traditional real estate. It is essential to verify a seller’s residency status early in the transaction to avoid closing delays. - Many Timeshares Sell for Low Prices, Making Withholding Minimal
Since timeshares often sell for relatively low amounts, the required FIRPTA withholding may be small. In some cases, the cost of hiring a tax professional to navigate the withholding process may exceed the withholding amount itself. However, this does not eliminate the requirement for foreign sellers to file a U.S. tax return. - Withholding Applies Even If the Seller Takes a Loss
Timeshare resales often sell for less than the original purchase price, but FIRPTA still mandates 15% withholding based on the gross sales price—not the seller’s profit or loss. Proper planning can help avoid unnecessary tax burdens for foreign sellers.
Buyers Are Responsible for FIRPTA Compliance
If FIRPTA withholding is not properly filed, the buyer may be held liable for the tax. As a title company or real estate agent, it’s crucial to ensure all FIRPTA obligations are met before closing to protect your clients from unexpected liabilities.
Navigating FIRPTA for Timeshares
Key Steps for Compliance
- Identify Foreign Sellers Early: Confirm the seller’s status at the beginning of the transaction to avoid last-minute issues.
- Consider Withholding Certificate Requests: Foreign sellers expecting little or no taxable gain can apply for a FIRPTA Withholding Certificate (IRS Form 8288-B) to reduce or eliminate withholding. Since the process can take months, it’s important to start early.
- Work with FIRPTA Specialists: Timeshare transactions often involve smaller amounts, but failure to comply with FIRPTA can lead to major tax liabilities. At Total FIRPTA, we’re here to provide expert guidance every step of the way.
Why FIRPTA Compliance Matters
Noncompliance can lead to IRS penalties, delayed closings, and unexpected tax liabilities. As a title company or real estate agent, it’s crucial to be proactive in ensuring FIRPTA requirements are met to protect your clients.
Final Thoughts
If you are handling a timeshare sale with a foreign seller, you need to be aware of FIRPTA requirements to avoid delays and tax liabilities. By identifying foreign sellers early, exploring withholding certificate options, and working with FIRPTA specialists, you can ensure a smooth, compliant transaction. Staying informed and proactive will help protect both you and your clients from unexpected complications.
Need assistance with FIRPTA compliance on a timeshare sale? Contact Total FIRPTA today for expert guidance!