All Forum Posts by: Kenny Wyland

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.

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

CA FTB Form 593

Hi Lori,

You can think of yield as the other side of an interest rate. It's also referred to as Return On Investment (ROI). If you borrow money from a bank at 5% interest, you are paying a 5% interest rate and the lender is making a 5% yield (at least in simple terms, paying points and such can change these numbers a bit). "Yield" refers to how much extra money (as a percentage of the investment) is your investment going to yield over time.

Time is an important factor in this calculation. If you invest $1,000 and you receive your $1,000 back plus $100 in interest, that looks like it would be a 10% yield because you received 10% more than put in. However, when you take time into account, that number can change. For example, if you invested $1000 today and received your $1100 back tomorrow that's obviously a better yield than if you invested $1000 today and received your $1100 back 10 years later. This is why Yield is expressed as a percentage per year. That 5% interest rate is fully expressed as 5% APR (Annual Percentage Rate) or as 5% I/YR (Interest per Year).

To use the example of the $1000 investment, if I invested $1000 now and received the $1100 after 1 year, my annualized yield would be 9.57% per year. If I received the $1100 after 2 years, my annualized yield would be 4.77% per year. The reason the 1 year yield is a little less than 10% and the 2 year yield is a little less than 5% per year is because of the effect of time. Money far off in the future isn't worth as much as money in the hand today, so if you have to wait 12 months to get your "10%" return then in reality it is only a 9.57% return. If you have to wait 24 months to get your "10%" return, then in reality it was only a 4.77% per year return.

Hopefully that helps, at least a little, with understanding what yield is and why the numbers are the way they are. It's a very complex topic, so it's hard to encapsulate in a short post.

As for the formula and math behind yield... This may be shocking, but there is no direct formula to calculate yield. The way it works (even inside the calculator) is that you start with your N (120), your PV (-$6,000), your PMT ($132.15) and your FV ($0). Then you take a guess at the yield and then plug that into the formula for Present Value (or Future Value) and compare that calculated PV with your original PV (-$6,000). Then you adjust your guess and keep calculating until you find the right yield! That's how the calculator does it!