How to Reclaim US Tax on Disney Vacation Club Sale from the UK?
Published on March 05, 2024
by Clark Stott
Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.
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Yes, you can claim it back from the IRS. British sellers of Disney Vacation Club (DVC) memberships are subject to IRS tax under FIRPTA regulations when they sell property in the US. They can potentially get this tax back or reduce the amount owed by applying for a withholding certificate using IRS Form 8288-B before the sale, or by filing a US tax return to claim a refund for overpayment.
What is Disney Vacation Club (DVC) and why is it popular among British investors?
Disney Vacation Club (DVC) is a timeshare program operated by Disney, offering ownership interests in resorts and properties that promise magical vacations year after year.
Its popularity among British investors stems from the allure of having a stake in the Disney dream, coupled with the potential for rental income and appreciation in property value.
When a British national decides to sell their DVC property, they step into the realm of US tax regulations, specifically those governed by the Foreign Investment in Real Property Tax Act (FIRPTA).
FIRPTA mandates that foreign persons selling US real property interests are subject to US income tax on the gains derived from the sale. This is where IRS Form 8288-B, the Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests, comes into play.
What is FIRPTA?
FIRPTA is a US tax law that imposes income tax on foreign persons selling US real property interests. Its primary aim is to ensure that foreign investors pay US taxes on the gains they realize from the sale of US real estate, similar to the tax obligations of US citizens and residents.
For foreign sellers, including British nationals, FIRPTA means that any gain realized from the sale of US real property is subject to US income tax. Usually, the buyer must take 15% of the property’s sale price and pay it to the IRS upfront as tax for the seller.
This withholding serves as an advance on the seller’s potential tax liability from the sale. However, the actual tax liability may be more or less than the withheld amount, requiring the seller to file a US tax return to reconcile the difference.
Why does the IRS withhold 15% tax from non-US sellers on real estate transactions?
The IRS withholds a 15% tax from non-US sellers on real estate transactions to ensure that taxes owed on the sale of US property by foreign individuals are collected. This withholding acts as a mechanism to secure tax payment, given that collecting taxes from individuals who may not have other tax obligations to the US and may not reside in the US could otherwise prove challenging.
The withheld amount is not the final tax but a provisional payment. Sellers can file a US tax return the following year to report the sale, calculate the actual tax due, and apply for a refund if the withheld amount exceeds their tax liability.
How do I reclaim withheld tax as a non-US citizen?
As a non-US citizen, to reclaim tax withheld from the sale of US property, you must file your 8288-B and Property Sale Contract with the IRS.
You’ll need an ITIN to complete Form 8288-B.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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Why do British sellers need an ITIN when selling US property?
An Individual Taxpayer Identification Number (ITIN) is required for non-US citizens who need to file a US tax return but are not eligible for a Social Security Number (SSN). For British sellers of US property, including DVC properties, an ITIN is necessary to comply with IRS requirements.
- Form W-7 and ITIN Application: To apply for an ITIN, you must complete Form W-7 (Application for IRS Individual Taxpayer Identification Number). This form should be submitted along with your tax return (Form 1040-NR) and proof of identity documents. The ITIN serves as your tax identification number, allowing the IRS to process your return and administer any refunds due.
- Form 8288-B: Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests) can be a strategic tool for reducing FIRPTA withholding at the time of sale. By filing Form 8288-B, sellers can request a reduced withholding rate based on the estimated tax liability of the sale, rather than the standard 15% rate.
How do I apply for an ITIN from the UK without sending my British passport away?
You can use an IRS-approved Certified Acceptance Agent (CAA) in the UK. Expat Tax Online offers this service.
Complete the ITIN application form here:
https://www.expattaxonline.com/application-for-itin/
Will the IRS refund the tax to my UK bank account?
No. The IRS can only send funds to US bank accounts. If you don’t have a US bank account, the IRS will mail a cheque to your UK address. However, your UK bank may not process the cheque for you. In recent years, many UK banks have stopped processing US government cheques. It’s best to contact your bank to discover your options.
If you can’t find a UK bank to process your cheque, we recommend opening an account with Wise. Within your Wise account, you can open a US dollar savings account. You’ll then have a US Routing Number & US Account Number.
You may have to file a US tax return 1040-NR to get your bank details into the IRS system so you can have the tax refund sent to your Wise US bank account.
You can open a Wise account here.
Why should British sellers consider professional tax advice when selling DVC memberships?
Here are compelling reasons to seek professional tax advice:
- Complexity of FIRPTA Regulations: FIRPTA’s regulations can be complicated, with various exceptions and conditions that may apply to different sellers. A tax professional can help you understand these rules and optimize your tax position.
- Maximizing Financial Outcomes: Professional tax advisors can identify strategies to minimize FIRPTA withholding, and potentially increase the net proceeds from the sale. They can assist in preparing and filing Form 8288-B, advising on the timing of the application, and ensuring that all necessary documentation is accurately presented.
- Avoiding Penalties: Incorrectly reporting the sale of DVC memberships or failing to comply with FIRPTA withholding requirements can result in penalties.
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