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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.
As an important part of
the attempt 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.
The law requires the
buyer (called the transferee) to withhold from what would otherwise be paid
to the seller. This is handled by the state Withholding Services and
Compliance Dept.. 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.
The withholding is
3.33% 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.
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.
The seller is required
to sign a certification under penalty of perjury stating that they are
eligible for the exemption.
The law allows
applications for reduced withholding and waivers but not by individuals,
only by corporations and other entities.
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.
The escrow agent may
withhold and remit to seller’s money to the Franchise Tax Board if the
parties agree. The fee for this service may not exceed $45.00.
The only way to recover
the withholding, is by filing your California State income tax return.
All real estate
interests are covered by this law unless one of the exemptions applies. This
means the sale of fee title or easements or other interests may be subject
to withholding. |