Understanding Withholdings On Real Estate

By Matt Unangst, 23 Jan 16:18

• Has only applied to California residents since January 1, 2003
• Applies to all types of real estate
• Meant to increase state revenue
• The buyer is required to withhold from the amount that would go to the seller
• Overseen at the state level by the Withholding Services and Compliance Section
• 3 1/3 of the sales price must be withheld and paid to the state on the 20th day of the next calendar month after closing
• Certain exceptions: if property is primary residence, if property being sold at a loss, or if sale price is under $100k
• To get withholding returned, you must file a state income tax return
• Must be pro-rated for multiple sellers
• The escrow agent can be responsible for withholding if the parties agree

According to a law passed at the close of the 2002 legislative session, the state of California collects 3 1/3% of the gross sales price of every real estate sale in the state, extending a law that had previously applied only to out-of-state residents completing a transaction in California. If you last completed a real estate transaction prior to 2003 or have never before completed one, you probably have some questions about withholding. This article will hopefully answer some of those questions.

The withholding law was extended by the state legislature in order to increase state revenue by an estimated $285 million. The Withholding Services and Compliance Section of the state’s Franchise Tax Board was placed in charge of policing holding.

When selling property, it is important to keep the amount being withheld in mind when determining the property’s price. The withheld amount is taken from the gross sales price and is not affected by commissions or settlement costs for the transaction. It must be paid to the state by the 20th day of the next calendar month after the transaction is closed. To report and submit your withholding amount, use California forms 593 and 593B, which are to be submitted with your state income tax return.

Fortunately, there are a number of exemptions from withholding. If you are selling the property for less than $100,000, you are not required to withhold any money. This is also the case if you are selling the property for a loss. There are also exemptions for tax deferred exchanges and involuntary conversions of property. Corporations may apply to the state for further exemptions, but individuals may not.

The most important exemption for the majority of people, however, is that primary residences are exempt. Rules for whether or not the property merits primary residence status are laid out in Internal Revenue Code Section 121. Usually, you will have had to live in the home for two out of the last five years or last used the home as your principal residence. The two year term need not be consecutive: if the total amount of time that you have lived in the home during the last five years adds up to at least two years, the property meets the primary residence qualification.

When applying for an exemption, you will be required to sign a statement under penalty of perjury. You will have to pay the withholding when selling the property no matter if you have an exemption or not and you must file the necessary forms with your state income tax return in order to have the withholding refunded, minus any taxes for capital gains. Each property sold is considered separately when it comes to withholding. So, even if you lost money on real estate overall during the year, you will still have to pay for an individual transaction if it turns a profit.

Escrow agents are required by law to notify you of the state’s withholding requirements. They cannot, however, provide any sort of legal advice to you regarding exemptions, for which you will have to speak with a real estate attorney. Escrow agents often will pay the exemption for you out of the sale price for a small fee, which by law cannot be greater than $45. This can save you some paperwork and headaches.

A property co-owned by multiple people has the same withholding requirements as a property owned by a single individual. The amount of the withholding is pro-rated based on the percent ownership of the property held by each owner. This can sometimes mean that some of the owners are exempt from the withholding while others still must pay. Trusts must also meet withholding requirements. For a revocable trust, the person with control over the trust is treated as the seller. For an irrevocable trust, the trust itself is treated as the seller.

All types of real estate are covered by the withholding law, meaning that sales of easements, interests, or fee titles are subject to withholding.

For further information about withholding requirements, contact the Withholding Services Compliance Section at (888)792-4900, or check out its website at http://www.ftb.ca.gov/individuals/index.html#wh. The website includes an FAQ section with over 100 questions.

KEYWORDS: real estate, withholding, selling a home, franchise tax board, withholding services compliance section, trust, exemption, primary residence

Tags: withholding