Real estate withholding laws changing - Real Estate - Federal Tax Board, California - Interview

California CPA, Dec, 2002

New real estate withholding laws take effect Jan. 1. To learn what these new regulations mean to your clients or your business, the FTB provides the following Q&A.

Q: What are the changes to real estate withholding?

A: Assembly Bill 2065 (Chapter 02-488) revised Revenue and Taxation Code Sect. 18662 for sales of California real property that close on or after Jan. 1, 2003.

For sales closing before Jan. 1, withholding is required when the seller is a non-resident or a corporation with no permanent place of business in California.

The new law expands the withholding requirement to include residents. The new law also eliminates the waiver process for individuals, but provides more exemptions.

Q: What is real estate withholding?

A: Real estate withholding is a prepayment of state income taxes for sellers of California real estate.

Q: Who is subject to withholding?

A: For sales closing on or after Jan. 1, all individuals who sell California real property and do not qualify for an exemption are subject to withholding. Non-individual sellers with a last known street address outside of California who do not qualify for an exemption remain subject to withholding.

Q: Who are individuals? What are non-individuals?

A: Individuals are human beings. Non-individuals are entities, other than individuals, such as corporations, estates, partnerships and trusts.

Exceptions include revocable (grantor) trusts, which are not considered to be entities for taxable purposes.

So, if the property is held in the name of a grantor trust, the seller is considered to be the grantor, who is frequently an individual.

Q: Is the trustee or the trust considered the seller?

A: If the trust is irrevocable, then the trust is the seller and falls under the requirements for non-individuals. If the trust is revocable, then the seller is the grantor and would usually fall under the requirement for individuals.

Q: What are withholding exemptions for individual sellers?

A: * Total sales price does not exceed $100,000;

* Property is the seller's principal residence (IRC Sect. 121);

* Sales resulting in a loss for California tax purposes;

* Like-kind exchanges, with the exception of boot (IRC Sect. 1031);

* Involuntary conversions (IRC Sect. 1033); or

* Certain foreclosures.

Sellers meeting one of these exemptions must sign a written certification (Form 593-C) to be exempt from withholding.

Q: What are exemptions for non-individual sellers?

A: * Corporations with a permanent place of business in California;

* Partnerships or LLCs;

* Tax-exempt entities, insurance companies, IRAs or qualified pension plans;

* Irrevocable trusts with a California trustee;

* Estates with a California decedent; or

* Banks or banks acting as a fiduciary for a trust.

Sellers meeting any of these exemptions must sign a different form (Form 593-W) to certify that they are exempt from withholding.

Q: Is there still a waiver process for individuals?

A: No, but many of the reasons for which waivers were previously granted are now certifiable exemptions.

Q: Must the full 3 1/3 percent of the total sales price be withheld on installment sales?

A: Yes. However, withholding on the full sales price can be deferred if the buyer agrees to withhold 3 1/3 percent of the down payment and 3 1/3 percent of each payment thereafter.

The buyer must complete and sign Form 593-I, Real Estate Withholding Installment Sales Agreement, and attach it to Form 597 with the down payment withholding.

Q: When there are multiple sellers, how much is withheld from each?

A: The total withholding is calculated on the total sale price and then allocated to each seller in proportion to his or her ownership interest.

Q: When sellers certify that they meet a withholding exemption, should the information be sent to the FTB for review and approval?

A: No. The withholding exemption certificate (Form 593-C for individuals; Form 593-W, Part I for non-individuals) should only be sent to the FTB when it requests the form. The escrow office must keep these forms in their files.

Q: Is there still a waiver process for non-individuals?

A: Yes. However, requests for waivers or reduced withholding must be made using the new Form 593-W, Real Estate Withholding Exemption Certificate & Waiver Request for Non-Individual Sellers.

Q: Will the procedures change for paying and reporting the withholding?

A: Not for 2003. However, the FTB is exploring ways to streamline the payment and reporting processes for 2004.

Q: Has the due date for Form 597 and payment of withholding changed?

A: No. The due date remains the 20th day of the month following the month that the title is transferred.

Q: Will interest be assessed on late payments of withholding?

A: Yes. The interest is computed from the due date of the withholding payment to the date payment is received.

Q: Who is responsible for withholding?

A: The buyer or other transferee is responsible for withholding, completing Form 597, providing two copies of Form 597 to the seller, and providing one copy of Form 597 to the FTB along with the withholding payment by the due date.