California's Updated Property Tax Withholding Laws

California's property tax withholding laws have been revised recently, and below are some basics per the legal counsel of California Association of Realtors.
An important thing for buyers and sellers to note is that the REALTOR is not the person charged with informing the buyer and seller, it is the escrowholder (although it certainly helps if your REALTOR is knowledgeable and prepares you beforehand).
If the escrow officer does not inform the buyer of their requirements to withhold, then the buyer is not obligated to withhold the money from the seller. (This concerns California law only; the IRS also has additional requirements.)
"Buyers must withhold 3 1/3 percent of the gross sales price on sales of California real property interests from both individuals (e.g., "natural" persons) and non-individuals (e.g., corporations, trusts, estates) and pay this amount to the Franchise Tax Board (FTB), unless an exemption applies (Cal. 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. 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. Rev. & Tax Code § 18662(e)(3)(D)(iv));

seller's tax liability, calculated at the maximum rate regardless of seller's actual rate, will be less than 3 1/3% 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).)"

The required amount withheld in escrow must be transmittd to the FTB within 20 days after the close of escrow, and during escrow, the escrow officer should provide the buyer with an instruction form for the escrow officer to transmit those funds.


Howard said...

Hi Julia,

I always thought the Realtor was only responsible for brokering the deal between the buyer and seller. I'm sure there are a lot of other legal requirements that I'm not aware of.

What I found interesting is that 3.5% withholding is more than three times the annual property tax rate. Do you know why the FTB wants three years of property tax withheld?

- Howard

Julia Huntsman said...

Howard, this buyer withholding during escrow applies only if the seller's affadavit does not meet certain exemption requirements. That withholding rate has been the FTB's requirement for some time and I don't know that it has anything to do with the property tax rate. Consult your tax advisor on this, but I believe that the actual amount paid by a seller is in accordance with the rest of their final tax return deductions or payments on that property.
Yes, a Realtor is only supposed to broker the deal between the buyer and the seller, but the interpretation of what is "brokering the deal" is often misunderstood, and many clients often have expectations of their agents because real estate is very complex--many people don't know what their agent is or is not legally responsible for.

Anonymous said...

Isn't this the same tax that use to be called "FERPTA", having to do with foreign buyers of property here in the United States?

Julia Huntsman said...

Yes, the Foreign Investment Real Property Tax Act (FIRPTA) concerns the transferor, or seller, of a property when that person is a foreign person, per certain IRS requirements.
California also has its own tax laws requiring the buyer to withhold money from the seller's proceeds, which are in addition to the FIRPTA requirements, and there are exemptions which are included in this post.


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