Withholding and Transfers
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When your client wants to know if withholding is required when there is a transfer of California real property, the answer is yes. Withholding is required on any disposition of a California real property interest by a transferor.
Withholding is required unless any of the following apply:
- The total sales price is $100,000 or less.
- The seller is a bank acting as a fiduciary for a trust.
- The property is being foreclosed.
- The seller meets a full exemption on a certified FTB Form 593-C, Real Estate Withholding Certificate.
In real estate, deeds are legal documents that transfer property ownership from one party to another. There are many different types of deeds: property deeds, grant deeds, warranty deeds, fiduciary deeds, gift deeds, and quitclaim deeds. Each type of deed is used for a specific situation.
Grant and warranty deeds guarantee (warrant) that the grantor has full title to the property or the interest the deed states is being conveyed. A warranty deed is used in most real property sales and makes a guarantee that the grantor owns clear and complete interest in the title and the property is free of all liens.
The two deeds that we receive questions about the most in terms of withholding are the gift and quitclaim deeds.
A gift deed is a simple, notarized document that transfers ownership of a property to another person. Gift deeds are often used between relatives and friends. The person gifting the property is referred to as the donor, and the person receiving the property is referred to as the recipient. Gift deeds can be used only when there is no payment or compensation given to the donor in exchange for gifting the property.
A quitclaim deed contains no warranties of title. A quitclaim deed is used to transfer property interest from the grantor to the grantee. It is most often used to:
- Add a spouse's name to a property title.
- Transfer property to a child, sibling, or other family member.
- Transfer property interest to a business partner.
- Remove a spouse's name from a property title after divorce.
- Bequeath property to someone in a will.
A quitclaim deed is considered one of the easiest ways to legally transfer property. Quitclaim deeds carry no guarantee that the grantor possesses ownership of the property; rather it is a relinquishment of the grantor's rights, if any, to the property. Quitclaim deeds are also used to clear up questions of full title when a person has a possible but unknown interest in the property.
Thus for each transfer the transferor must certify an exemption on Form 593-C if the real property interest is more than $100,000. For example:
- A grandmother uses a quitclaim deed to transfer the grandmother’s personal residence, a California real property interest, to her granddaughter. Withholding is required unless the grandmother meets an exemption. In this example the grandmother may qualify for check box 1 or 2 under Part II, Certifications which fully exempt the sale from withholding, on Form 593-C. The grandmother may check all boxes that apply and certify a completed certificate.
- Mr. Right uses a quitclaim deed to transfer an office building he owns to a new corporation in exchange for 100 percent of the corporate common stock. Withholding is required unless Mr. Right meets an exemption. In this example Mr. Right may qualify for check box 5 under Part II, Certifications which fully exempt the sale from withholding, on Form 593-C. Mr. Right may check all boxes that apply and certify a completed certificate.
- Ms. Aunty uses a gift deed to transfer her personal residence to her favorite and only niece before moving to a care home. Withholding is required unless Ms. Aunty meets an exemption. In this example, Ms. Aunty may qualify for check box 1, 2, or 3 under Part II, Certifications, which fully exempt the sale from withholding, on Form 593-C. Ms. Aunty may check all boxes that apply and certify a completed certificate.
Remember, we highly recommend that the seller contact a tax professional to help them with their withholding forms.
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