These changes were purposely orchestrated by Governor Davis to attract the least amount of public notice, until it was too late for anyone to do anything about it.
The tax is now an upfront state income tax that's being collected by California from individual real estate investors, upon the close of escrow on the sale of their property.
What's most startling about this withheld tax is that it is 3.3% of the sales price of the property, rather than being charged against the gross profit or the seller's equity, etc.
If the average sales price of a home in California is $350,000, then 3.3% of that amounts to $11,550 dollars. If you do only 6 deals a year you'll be sending to California a pre-payment of almost $70,000 as withholding for your state income tax-about seven times what you'd really owe!! So we're going to be paying a multi-million surplus into the state and then have to wait months and months and months before we can get a refund of the overpayment!
There are some exemptions to the law, the details of which appear in the following chart and Q&A, both of which were obtained from the Board of Equalization's web site.
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Escrows Closing On or Before December 31, 2002
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Escrows Closing On or After January 1, 2003
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Sellers Subject to Withholding
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Individuals with a last known street address outside of California (nonresidents) and
Non-
individuals (corporations, estates, trusts, etc.) with a last known street address outside of California
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The new law expands real estate withholding to include all individuals (residents and nonresidents). It continues to apply to non-individuals with a last known street address outside California.
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Rate
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The withholding rate is 3 1/3 percent of the total sales price.
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No change.
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Threshold
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There is a withholding requirement only if the total sales price exceeds $100,000.
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No change.
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Certifiable Exceptions Individuals
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There is no withholding requirement if an individual seller is:
A resident of California or
Selling a principal residence.
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Individuals will no longer have an exemption for being a resident.
However,individuals can be exempt from withholding if they certify that they are:
Selling the property for $100,000 or less,
Selling their principal residence,
Selling the property at a loss for California income tax purposes,
Selling the property as part of an Internal Revenue Code Section
1031 exchange, or
Selling the property because of an involuntary conversion and
will replace the property within the provisions of Internal
Revenue Code Section 1033.
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Certifiable Exceptions Non-individuals
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There is no withholding requirement if a non-individual seller is:
A corporation with a permanent place of business in California,
A partnership or LLC,
A tax exempt entity, insurance company, IRA, or qualified pension plan,
An irrevocable trust with CA trustee,
An estate with CA decedent, or
A bank or bank acting as fiduciary for a trust.
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No change.
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Escrows Closing On or Before Dec. 31, 2002
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Escrows Closing On or After January 1, 2003
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| Waivers &
Reduced Withholding
Individuals |
Individuals can request a waiver or reduced amount
of withholding when there is little or no gain on the
sale or the estimated California income tax is
significantly less than the statutory withholding
amount. |
There is no waiver process for individuals.
The full amount of
withholding is required unless the sellers can certify that they meet one
of the exceptions or the buyer agrees to withhold on each payment of an
installment sale. |
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Waivers &
Reduced Withholding
Non-
individuals |
Non-
individuals can request a waiver or reduced
amount of withholding when there is little or no
gain on the sale or the estimated California income
tax is significantly less than the statutory
withholding amount. |
No change. |
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Multiple Sellers |
If there are multiple sellers only some of which are
nonresident individuals or non-
individuals,
you
must withhold on the total sales price even though
the nonresidents only own a portion of the property.
However,
the nonresident individual or non-
individual may request a reduced withholding
amount. |
For individual sellers,
withhold according to the sellers interest
in the property.
For non-
individua
l sellers,
there is no change. |
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Loss on Sale
Individuals |
Individuals can request a waiver if the sale will
result in a loss. |
There is no withholding on individual sellers if they can certify that the
sale will result in a loss.
The law no longer allows individuals to
request a withholding waiver. |
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Loss on Sale
Non-
individuals |
Non-
individuals can request a waiver if the sale will
result in a loss. |
No change. |
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Small Gain
Individuals |
Individuals can request a waiver or reduced amount
of withholding if the gain on the sale will result in
significantly less California income tax than the
statutory withholding amount. |
Full withholding is required unless the individual has a loss on the sale
for California income tax purposes.
The Franchise Tax Board cannot
allow reduced withholding for individual sellers. |
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Small Gain
Non-
individuals |
Non-
individuals can request a waiver or reduced
amount of withholding if the gain on the sale will
result in significantly less California income tax
than the statutory withholding amount. |
No change. |
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Escrows Closing On or Before Dec.
31,
2002 |
Escrows Closing On or After January 1,
2003 |
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Exchanges |
If the sale is part of an Internal Revenue Code
Section 1031 exchange,
the seller may request a
waiver of withholding from the Franchise Tax
Board.
Any boot (cash or cash equivalent)
received
by the seller is subject to withholding. |
Individuals can certify that the sale is part of an Internal
Revenue Code Section 1031 exchange and
1.
If it is a simultaneous exchange,
only the proceeds (boot)
going to the seller will be withheld upon in escrow,
or
2.
If it is a deferred exchange,
the proceeds will go to an
intermediary who will withhold,
if necessary.
Non-
individuals must still request a waiver from FTB to
eliminate or reduce withholding in escrow. |
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Due Dates |
Withholding is due to the Franchise Tax Board by
the 20
th
day of the month following the month
escrow closes. |
No change. |
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Forms |
Form 597,
Nonresident Withholding Tax
Statement for Real Estate Sales
Form 597-
E,
Nonresident Withholding
Exchange Affidavit
Form 597-
I,
Nonresident Withholding
Installment Sale Agreement
Form 597-
W,
Withholding Exemption
Certificate and Nonresident Waiver Request for
Real Estate Sales |
Form 597,
Real Estate Withholding Tax Statement
(Used to
report withholding on all individuals and non-
individuals.)
Form 593-
C,
Real Estate Withholding Exemption Certificate for
Individual Sellers
(Used by individual sellers when they can
certify that they meet one of the exceptions.)
Form 593-
I,
Real Estate Withholding Installment Sale
Agreement
(Used by buyers when the seller is an individual and
the buyer wants to withhold on each payment instead of withholding
the full amount at the time of sale.)
Form 593-
L,
Real Estate Withholding
Computation of Gain or
Loss
(Used by individual sellers to compute the gain or loss on the
sale.)
Form 593-
W,
Real Estate Withholding Exemption Certificate
and Waiver Request for Non-
individual Sellers
(Used by non-
individual sellers to certify that they meet one of the exceptions or to
request a waiver or reduced amount of withholding when there will
be little or no gain.)
Note:
Only
the 2002 revision of Form 597 and new Forms 593-
C,
593-
L,
593-
I and 593-
W can be used for sales closing on or after
January 1,
2003.
Forms 597-
E,
597-
I,
and 597-
W may not be used. |
