California Withholding Tax on the Sale of Real Property

1 California Withholding Tax on the Sale of real Property Member Legal Services Tel (213) 739 8282. Fax (213) 480 7724. Feb. 12, 2016 (revised) Table of Contents I. Introduction II. California Law A. The Basics B. Reduced Withholding C. Handling of Funds and Reporting D. Fee E. Potential Liability F. Seller's Affidavit G. The Purchase Contract H. California Tax Forms and Publications I. Additional Information I. Introduction This legal article discusses the requirement under California law that a buyer (or transferee) withhold and transmit to the Franchise Tax Board (FTB) funds equal to 3 1/3 percent of the sales price of California real Property at the time of transfer of the Property unless an exemption applies for the seller (or transferor).

2 This article is based on California Revenue and Taxation Code Sections 18662 and 18668 (as amended by AB 1388 and AB 2969) the 2007 California FTB Forms 593 C, 593 E, instructions . and " real Estate Withholding Guidelines," FTB Pub. 1016, rev. 1 2007. The following questions and answers are necessarily general in nature, and are not intended to cover every fact situation. Slightly different facts may produce different results. Accordingly, parties should consult a professional tax advisor to determine whether (and how much) Withholding is required in a particular transaction.

3 As used in this article, "seller" means any transferor, and "buyer" means any transferee, unless specified differently under the California Withholding law. II. California Law A. The "Basics". Q 1. What is a quick summary of California law for Withholding on the sale of California real Property and some exemptions? A Buyers must withhold 3 1/3 percent of the gross sales price on sales of California real Property interests from both individuals ( , "natural" persons) and non individuals ( , corporations, trusts, estates) and pay this amount to the Franchise Tax Board (FTB), unless an exemption applies (Cal.)

4 Rev. & Tax Code 18662(e)(1)(A), (B), (2)(A)). Escrowholders must give buyers written notice of these Withholding requirements. If the escrowholder fails to give the buyer this written notice, then the buyer is off the hook for the Withholding tax liability. ( (Cal. Rev. & Tax Code 18662(e)(3)(B).) Typically, the escrowholder submits both the form and money withheld to the FTB. The exemptions include: the sale of Property for less than $100,000 (Cal. Rev. & Tax Code 18662(e)(3)(A)) for individuals, the sale of a principal residence or a Property last used as a principal residence (Cal.)

5 Rev. & Tax Code 18662(e)(3)(D)(i)) the sale of a decedent's principal residence by the estate (Cal. Rev. & Tax Code 18662(e)(3)(D). (i)) the sale of Property by a corporation with a permanent place of business in California (Cal. Rev. &. Tax Code 18662(e)(3)(D)(v)) . an Internal Revenue Code (IRC) 1031 exchange (without any recognized gain)(Cal. Rev. & Tax Code 18662(e)(3)(D)(ii)) . an involuntary conversion under IRC 1033 (Cal. Rev. & Tax Code 18662(e)(3)(D)(iii)) . the sale of Property at a net loss (or a net gain not required to be recognized) for California income tax purposes (Cal.

6 Rev. & Tax Code 18662(e)(3)(D)(iv)) . seller's tax liability, calculated at the maximum rate (currently ) on the taxable gain, regardless of seller's actual rate, will be less than 3 1/3%of the gross proceeds and seller certifies that fact under penalty of perjury. (For tax rate for corporations, see Cal. Rev. & Tax Code 23151 or 23186 . for maximum tax rate for other sellers, see Cal. Rev. & Tax Code 17041.) (Cal. Rev. & Tax Code . 18662(e)(2)(B).). Q 2. What sales are covered under this law? A California law states that there must be Withholding on "any disposition of a California real Property interest" (Cal.

7 Rev. & Tax Code 18662(e)). This includes sales, exchanges, installment sales, and other types of transfers. Q 3. What are the exemptions to this law? A No Withholding (or a reduced Withholding ) is required when any one of the following exemptions applies. NO Withholding AT THE TIME OF SALE (TRANSFER) FOR THE FOLLOWING: The sales price of the Property is equal to or less than $100,000 (Cal. Rev. & Tax Code . 18662(e)(3)(A)). The buyer does not receive written notification of the Withholding requirement from the " real estate escrow person.

8 (This exemption does not apply to a 1031 exchange accommodator.) (Cal. Rev. & Tax Code 18662(e)(3)(B).). The Property is the seller's principal residence within the meaning of IRC 121 ( , the seller has owned and used the Property as a principal residence for two out of the last five years) (For this exemption, the buyer must withhold unless she/he relies in good faith on a written certificate signed by the seller certifying the information under penalty of perjury.) (Cal. Rev. & Tax Code 18662(e)(3). (D(i)(I).).)

9 The Property was last used as the seller's principal residence within the meaning of IRC 121. (This exemption applies even though the seller may not have owned and used the Property as a principal residence for two out of the last five years.) (For this exemption, the buyer must withhold unless she/he relies in good faith on a written certificate signed by the seller certifying the information under penalty of perjury.) (Cal. Rev. & Tax Code 18662(e)(3)(D(i)(II).). The seller is a corporation with a permanent place of business in California (a corporation does not have a permanent place of business in California if all of the following apply.))

10 (1) it is not a California corporation, (2) it does not qualify with the California Secretary of State to transact business in California , and (3) it does not maintain and staff a permanent office in California ) (For this exemption, the buyer must withhold unless she/he relies in good faith on a written certificate signed by the seller certifying the information under penalty of perjury.) (Cal. Rev. & Tax Code . 18662(e)(3)(D)(v)). The Property was the decedent's principal residence within the meaning of IRC 121.