Real Estate Withholding - Frequently Asked Questions

• Estates and Trusts
• Seller′s Tax Identification Numbers
• Foreclosure
• Sale or Transfer
• Exchanges
• Liens
• Refunds and Credits
• Forms 592 and 592–B
• Real Estate Withholding Requirement

Estates and Trusts

Do the words "estate" and "trust" have the same meaning under real estate withholding requirements?

No. The words estate and trust are commonly interchanged when referring to a deceased person′s property and possessions, but they are not interchangeable for withholding or tax purposes.

Withholding definitions:

• Estate – The decedent′s total assets and liabilities at the time of death.
• Trust – A legal entity created by a grantor under the laws of the state by a valid trust instrument for the benefit of designated beneficiaries.
• Beneficiary – One who is lawfully entitled to the proceeds of property, the title to which is vested in another, such as an executor or trustee.
• Fiduciary – guardian, trustee, executor, administrator, receiver, conservator, or any person (individual or organization) responsible for the custody and/or administration of property of any person, estate or trust.
• Trustee – An individual or organization that holds or manages and invests assets for the benefit of another.

Tax treatment:

• A grantor trust is disregarded for tax purposes. The trust income and withholding payments must be included on the grantor′s tax return as if the trust didn′t exist. The grantor′s name and individual taxpayer identification number (ITIN) are used on all withholding forms. Generally, the social security number (SSN) of the grantor is used.
• A non–grantor trust is a separate entity from the grantor for all tax purposes. The trust name and federal employer identification number (FEIN) are used on all withholding forms. Generally, the FEIN of the trust is used.

How do I determine when I need to withhold or when an exemption may be claimed?

Refer to Form FTB 7429, Do I Need to Withhold on This Trust?

How do I determine the last use of a principal residence?

The last use is determined by the property's use immediately preceding the sale.

If an estate or trust has applied for but not received a FEIN, what should be entered on Form 593 for the seller′s ITIN?

If an estate or trust does not have a FEIN, write applied for in the ITIN box on Form 593. Do not enter the decedent′s or trustee′s SSN.

When you receive the FEIN, complete an amended Form 593 as follows:

• Check the Amended box at the top of the amended Form 593.
• Write Copy across the top of original Form 593.
• Write a letter explaining the changes you made and why.
• Fax the following documentation to (916) 845–9512, Attention: Withholding Services and Compliance.
  • Amended Form 593
  • Original Form 593
  • Letter explaining changes
• Provide seller a copy.

Seller′s Tax Identification Number (ID)

If the seller′s tax ID number is not provided on Form 593–C, what does the escrow officer do?

If the seller does not have or does not provide a tax ID number on Forms 593, 593–C, or 593–E then:

• The seller does not qualify for an exemption.
• Any certification of an exemption is void, and the escrow officer should withhold 3 1/3 percent of the total sales price.

What should the escrow officer do if the buyer wants a copy of Form 593–C or Form 593, but the seller doesn′t want the buyer to have his or her tax ID number?

The escrow officer can remove the seller′s tax ID number from the buyer′s copy only, but not from the other copies.

Foreclosure

If California real property is being sold anytime before the property is being foreclosed upon, is withholding required?

Yes, withholding is required. The automatic exemption from withholding due to foreclosures applies when the property is acquired under any of the following circumstances:

• At a sale due to a power of sale under a mortgage or deed of trust.
• At a sale due to a decree of foreclosure.
• By a deed in lieu of foreclosure.

Note: A sale in anticipation of a pending foreclosure action does not qualify as an exemption. Withholding is required.

Sale or Transfer

What is a sale or transfer of California real property and when is withholding required?

A sale or transfer of California real property includes both:

• A sale, exchange, or any transfer from one party to another.
• Any transaction where a party on title before the transaction is not on title after the transaction is completed.

Withholding is required for the following transaction where a party on title before the transaction is not on title after the transaction is completed:

• Gift (debt relief): Withholding is required if the person going off title is being relieved of liability and/or receiving proceeds and the sum of the debt relief and proceeds exceeds $100,000. The amount subject to withholding is the amount of debt relief plus any proceeds received by the person going off title.
• Refinance, if an owner goes off title in the refinance (debt relief). The amount subject to withholding is the amount of debt relief plus any proceeds received if:
  • The person going off title is relieved of liability and/or
  • The person going off title receives proceeds and
  • The sum of the debt relief and proceeds is more than $100,000.

Withholding is not required when sellers are on title for incidental purposes.

See FTB Publication 1016, Real Estate Withholding Guidelines, for more information.

Exchanges

What are the 1031 like–kind exchange requirements to qualify for a withholding exemption?

To qualify for an exemption of withholding for a like–kind or deferred like–kind exchange, the seller must exchange qualifying property for like–kind property.

• Qualifying property is property held for investment or productive use in a trade or business.
• Like–kind property is property of the same nature or character, even if it differs in grade or quality. If the seller receives taxable proceeds (boot) exceeding $1,500 from the sale, then withholding is required on the boot.

For more information, see IRC Section 1031 and IRS Publication 544, Sales and Other Dispositions of Assets.

If a 1031 exchange fails, what happens?

If the exchange does not take place or does not qualify for the exemption, then:

• The intermediary or accommodator withholds 3 1/3 percent of the total sales price or the alternative election of the maximum tax rate on the certified amount of gain.
• The sale must be reported in the year that it fails.

If the seller reports the sale for the tax year that the exchange began rather than on the year that it failed, the seller can contact us in writing to fix the error.

Example of failed exchange:

• Taxpayer claims an exemption from withholding due to a like–kind exchange that began in December 2006.
• Taxpayer reports the gain from the sale of his property on the 2005 tax return.
• The exchange failed in January 2007 and was reported on the 2007 Form 593, Real Estate Withholding Tax Statement.
• Taxpayer contacts us in writing to move the real estate withholding to the 2006 return.

Liens

What should the escrow officer do when withholding is required and the taxpayer has a state tax lien?

Contact our Lien Group.

Refunds and Credits

Where is my refund or credit?

Call (916) 845–4900 or (888) 792–4900 for assistance. Have the following documents available when you call:

• Copy of the cancelled check (front and back).
• Copy of Form 593–B (for tax years 2007 and prior) or Form 593 (for the 2008 tax year and forward).

Forms 592 and 592–B

Is the escrow officer responsible for processing Forms 592 and 592–B?

No. Generally, the real estate escrow person processes Form 593. When a pass-through entity is a recipient of Form 593 and the withholding credit must "flow-through", the withholding credit is allocated using Forms 592 and 592–B. See FTB Publication 1017, Nonresident Withholding Guidelines, for more information.

What tax-year forms do we use when escrow opens in one year and closes in a different year?

Use the current tax-year forms when you close escrow.

Example: Escrow opens December 3, 2007 and closes January 19, 2008. Use the 2008 forms to ensure compliance with current tax law and protect both the seller and escrow officer from possible penalties and interest.

Real Estate Withholding Requirement

Why is the state withholding on my real estate transaction?

We administer the tax laws for the State of California, including withholding as provided in Revenue and Taxation Code Section 18662.