UNDERSTANDING WITHHOLDING ON REAL ESTATE SALES

Question: When did withholding start for California residents?

Answer: The withholding law applies to dispositions of California Real Estate by both residents and non-residents which close on and after January 1, 2003. Previously, withholding has only been required of certain non-resident sellers.

Question: Why was this withholding law enacted?

Answer: As part of attempting to balance the state budget, this withholding provision was added to legislation on the last day of the Legislative session in 2002. It was estimated to accelerate collection of $285 million in additional state revenue.

Question: Who is responsible for withholding?

Answer: The law requires the buyer (called the transferee) to withhold from what would otherwise be paid to the seller.

Question: What unit at the Franchise Tax Board handles the withholding?

Answer: The Withholding Services and Compliance Section handles the withholding. The phone number is (888) 792-4900 and information can be found on their website at: http://www.ftb.ca.gov/geninfo/wscs/index.html.

You may check the Franchise Tax Board website both to see how the process currently works and for any updates. The Franchise Tax Board website currently has over 50 frequently asked questions which may be updated to reflect the changes to the law.

Question: How much is the withholding?

Answer: The withholding is 3 & 1/3% of the gross sale price. It does not take into account costs of the sale such as real estate commissions or other settlement costs. Withholding is currently due by the 20th day of the calendar month following the date title is transferred. California Form 597 is used to report and a remit copy must be provided to the seller to attach to their tax return.

Question: What exemptions apply?

Answer: If you are an individual selling property, the buyer will not have to withhold from your proceeds if the sale price is less than $100,000, or you are selling your principal residence or if you are selling at a loss. Other exemptions are for tax deferred exchanges and involuntary conversions of property.

Question: Does the seller have to do anything to qualify for exemptions?

Answer: Yes. The seller will be required to sign a certification under penalty of perjury as their eligibility for the exemption.

Question: Can the seller apply to the Franchise Tax Board for an exemption?

Answer: The law allows applications for reduced withholding and waivers but not by individuals, only by corporations and other entities.

Question: What is the role of the escrow holder regarding withholding?

Answer: The law requires the escrow holder to provide a notice of the requirements. The escrow holder cannot make a legal determination as to whether any exemption applies.

Question: Will the escrow agent do the withholding of the seller’s money on behalf of the buyer?

Answer: The escrow agent may withhold and remit to the Franchise Tax Board if the parties agree. The fee for this service may not exceed $45.00.

Question: How will a seller get the withholding returned?

Answer: The only way to recover the withholding is by filing your California State income tax return.

Question: Does it matter if the seller lost money on other real estate or non-real estate transactions?

Answer: No. Each transaction is considered separately.

Question: What type of real estate is covered by the new law?

Answer: All real estate interests are covered unless one of the exemptions applies. This means the sale of fee title or easements or other interests may be subject to withholding.

© January, 2003 REVISED

This article was published by the California Land Title Association. Member companies of the California Land Title Association are dedicated to facilitating the transfer of real property throughout California and increasing the public's awareness of the value and purpose of title insurance.

Content provided to MLSHomeQuest.com by the California Land Title Association. The California Land Title Association encourages readers with questions to contact any of its member Title companies for assistance.