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Tax Withholding on Real Estate Sales Expands Drastically

An Estimated 300,000 Sales Impacted to Accelerate Revenue by $225 Million.

Starting in January, people buying California real estate must withhold 3-1/3 percent of the sales price and send it to the Franchise Tax Board, according to the FTB.

For real estate sales closing after December 31, 2002, the new law (AB 2065) requires buyers of California real estate to withhold income taxes and send them to the FTB. In most cases, the FTB believes the buyers will delegate this duty to the escrow officers who are, by law, required to notify buyers of their withholding requirements. The penalty for not complying is the greater of $500 or 10 percent of the withholding amount.

This new law is a major change with broad impacts. The FTB does not want anyone to be caught off guard next year when the new law takes effect.

There are some exceptions in the law. Withholding is not required if the total sales price is $100,000 or less, or for principal residences, sales resulting in a taxable loss, like kind exchanges, and some involuntary conversions. Also exempted are sales where the seller is tax exempt or a California corporation or partnership.

Current real estate withholding laws only apply to sales by nonresident sellers of California real estate. The new law expands to include all individuals- residents and nonresidents. Unlike the current law, the FTB will not grant individuals a waiver or reduced rate of withholding for sales with small taxable gains. The FTB estimates this law impacts 300,000 real estate sales each year.

Tax withholding is a prepayment of state taxes that sellers who profit from their real estate sales will owe. It is much like the wage withholding that employees have deducted from their paychecks. California, like the federal government, has a “pay as you go” tax system, meaning taxes are due as you earn income, not after the end of the year when you file your tax return. Real estate withholding will, in many cases, save the seller from having to make an estimate payment to cover the tax from the real estate sale's gain.

For more information, access the FTB's Website at www.ftb.ca.gov or call the FTB at (888) 792-4900.