How to Elect Out of Withholding on Installment Payments Following the Close of Escrow
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California Revenue and Taxation Code Section 18862(e)(3)(E)(i) requires withholding on each installment payment when the sale is structured as an installment sale within the meaning of Internal Revenue Code Section (IRC) 453(b). The purpose is to ensure that the withholding matches the income. However, a seller can request to elect-out of the installment sale withholding method by filing an income tax return and reporting the entire sale in the year of the sale. IRC 453(d) allows this election out if the taxpayer files their tax return or before the due date (including extensions) for filing the income tax return for the year in which the sale occurs. If a seller elects out of the installment sale reporting on the income tax return, then we offer a release from withholding on the installment payments to the buyer. A written request is made by the seller after filing the income tax return. The written request should include the following information:
- Name, address, and taxpayer identification number of seller.
- Name, address, and taxpayer identification number of buyer.
- Address or assessor's property number of the property sold.
- Tax year and date the total sale of property sold was filed.
Send or fax the written information to our contact information, Attention: WISE Program.
Prior to 2009 a seller could choose to have withholding on the total sales price when the sale was structured as an installment sale. Currently the transferee or buyer is required to remit withholding to us on each principal payment until the principal is paid in full.
For example, Ms. Locket sold property prior to 2009 that didn't qualify for an exemption on Form 593-C other than an installment sale (a partial exemption), selected the option to withhold California real estate withholding all in the first year of sale. Ms. Locket sold the California property for $1 million. Withholding of $33,300 was withheld and remitted to us timely. If Ms. Locket filed her income tax return and reported the sale as an installment sale, with little or no principal payment received during the first year and little or no taxes due, then the withholding of $33,300 was refunded when claimed on her income tax return. When all the real estate withholding is refunded in the first year, there no longer is any withholding left to match the income in future years when the principal payments are received.
If Ms. Locket sold her property after 2008, then the buyer is required to withhold on the down payment during escrow and all principal payments made to Ms. Locket following the close of escrow. The buyer remits the real estate withholding to us and Ms. Locket has a payment credit on her FTB account. The buyer will continue to withhold on all installment payments until Ms. Locket has elected out of withholding by timely filing her tax return and claiming the entire sale, submit a written request to us asking to release the buyer from withholding, and receives an approval from us.
For example, you help Ms. Locket file her income tax return. Under your direction Ms. Locket elects-out of installment sale reporting by reporting the total sale on the state income tax return and not using form FTB 3805E or IRS Form 6252. Ms. Locket files her timely tax return as prepared and pays the tax. After Ms. Locket's tax return is filed and received by us (we must be able to verify Ms. Locket timely filed and reported the entire gain from the sale), then advise Ms. Locket to submit a written request to us asking to release the buyer from withholding on future installment sale payments. Once the written request is received, we will issue an approval or denial within 30 days. Meanwhile, the buyer is required to withhold and remit to us until the approval is received.
For more information or to see if your client qualifies for this option, contact the Withholding Services and Compliance Section at 888.792.4900.
Withholding Services and Compliance
- 8 a.m. to 5 p.m. weekdays, except state holidays.
- 916.845.4900 (Outside U.S.).
California Relay Service
711 or 800.735.2929
TTY (Device to Device)
- Withholding Services - Use this email service for general questions that do not require entering confidential information.
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