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Qualified Intermediaries and Real Estate Withholding

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If you are a Qualified Intermediary (QI) or an accommodator, meaning the entity that facilitates a like-kind exchange, it is very important to know the difference between a simultaneous[1] or deferred exchange.[2] Here is why:

California Revenue and Taxation Code Section (R&TC) 18662(e)(2)(A) states that in the case of any disposition of a California real property interest by a transferor, the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to 3 1/3 percent of the sales price of the California real property conveyed. Section 18662(e)(3)(B) states that an intermediary or an accommodator in a deferred exchange is required to withhold even if the real estate escrow person (REEP) fails to provide the written notice.

Why is this important? A REEP is required by statute to provide written notice to the buyer of the withholding requirements unless it is a deferred exchange. A deferred exchange is specifically mentioned in statute and requires the QI to withhold on a deferred exchange when required. If a QI is involved, then the REEP does not have the requirement to provide notification of withholding to the buyer. Therefore, a QI cannot say that the reason there is no withholding is because the REEP didn't notify me of our withholding requirements.

A QI in a deferred exchange has withholding obligations and is subject to penalties for failure to do so. As a QI you must withhold when boot is paid or the exchange fails, or you may be liable[3] for the greater of the following amounts for failure to withhold:

  • Five hundred dollars ($500)
  • Ten percent of the amount required to be withheld

When there is a deferred exchange, the REEP does not have an obligation to notify or withhold for the buyer. However, if there is a simultaneous exchange, the REEP is required to notify the buyer including for this purpose any QI.

At a glance, the table below summarizes who is responsible for notification, penalties, and withholding on California real property interest in a deferred exchange and simultaneous exchange:

Responsible Party Simultaneous Exchange Deferred Exchange

Notification to Buyer

REEP

QI

Subject to Penalties

Buyer/REEP

QI

Withholding Agent

Buyer/REEP

QI

Contact

Contact us between 8 a.m. to 5 p.m. weekdays, except state holidays.

Phone:

  • 888.792.4900
  • 916.845.4900 (outside U.S.)

California Relay Service
711 or 800.735.2929

TTY (Device to Device)
800.822.6268

Fax: 916.845.9512

Email: Withholding Services - Use this email service for general questions that do not require entering confidential information

[1] A simultaneous like-kind exchange occurs when you close the entire transaction simultaneously. A simultaneous exchange is when escrow closes concurrently on the relinquished property (the property being sold in the exchange) and the replacement property (the property being purchased in the exchange).
[2] A deferred like-kind exchange is more complex but allows you to dispose of property and subsequently acquire one or more other like-kind replacement properties. A deferred exchange is when you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. The transaction must be an exchange (that is, property for property) rather than a transfer of property for money used to buy replacement property. Refer to Internal Revenue Code Section 1031 and its regulations for complete rules and definitions.
[3] California Revenue and Taxation Code Section 18668(d).

Back to April 2015 Tax News

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