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Withholding Requirements for Sale of California Real Estate

Real estate withholding is a prepayment of income (or franchise) tax due from sellers or transferors on the gain from the sale of California real property. It is not an additional tax on the sale of real estate.

Withholding is required by the buyer; however, the withholding may be performed by the real estate escrow person (REEP) on the buyer’s behalf.

Real estate withholding is required whenever there is a transfer of title on California real property. Examples are:

  • Sales or transfers of real property (including exchanges and gifts).
  • Leaseholds/options.
  • Short sales.
  • Easements.
  • Personal property sold with real property (if not stated separately).
  • Deferred exchanges.
  • Vacant land.

An installment sale is a sale of California property in which the seller or transferor receives at least one payment after the tax year in which the sale occurs.

Withholding requirements

For each real estate transaction, a buyer or transferee must withhold on:

  • The principal portion received in escrow (excluding interest).
  • Each installment payment (principal only).

We do not require withholding:

  • On interest that accrues on the installment payments.
  • If other exemptions apply, see Form 593-C, Real Estate Withholding Certificate.

Withholding payments are due to us by the 20th day of the following month the buyer or transferee makes an installment payment. They may choose to mail withholding payments to us monthly, quarterly, or annually provided that they send their payment to us by the first installment due date during that calendar year (see examples in payment options section).

Withholding calculation options

You may choose to calculate the withholding amount using the Total Sales Price Method or the Optional Gain on Sale Election method, also known as the Alternative Withholding Calculation Method.

Total Sales Price Method

If no exemptions apply, use this method to withhold 3 1/3 percent on each installment payment’s principal portion (exclude interest).

To calculate the withholding, complete the following:
Enter the installment payment amount (principal only) $________ x 3 1/3% = $________.

If you do not know the installment payment amount, use the instructions in the table below to determine the amount to insert in the installment payment formula above.

If you are withholding on . . . Then, enter the . . .
The down payment in escrow. Down payment (subtract the promissory note amount from the sales price).
An installment payment following the close of the real estate transaction. Principal portion of the payment.
The final payoff amount in escrow. Remaining principal required for payoff.

Enter withholding amount due and reportable on Form 593, line 5, and Amount of payment on the Form 593-V voucher.

Example 1: Down Payment (or initial payment) due during escrow

If you know the down payment amount, complete the equation as follows:

Down payment amount...$100,000
Multiply by 3 1/3%.............. x .0333
Withholding amount............$3,330

If you don’t know the down payment amount, compute it as follows:

Seller or transferor sold property for a total sales price of $300,000 and wrote a $200,000 promissory note.

To calculate the down payment amount, subtract the promissory note from the sales price:

Total sales price.................$300,000
Promissory note..................($200,000)
Down payment amount.......$100,000

Enter the down payment amount into the original calculation to compute the withholding amount due:

Down payment amount...$100,000
Multiply by 3 1/3%.............. x .0333
Withholding amount............$3,330

Enter $3,330 as the amount withheld on Form 593, line 5.

Example 2: Installment payments following the close of the real estate transaction

The seller or transferor sold a property with monthly installment payments of $2,000 (principal only). Using the information provided, we chose to apply the total sales price method to determine the withholding amount due.

In the table above, we are “withholding on an installment payment following the close of the real estate transaction,” so we need the “principal portion of the payment” or $2,000 for the calculation.

Monthly principal installment payment...$2,000
Multiply by 3 1/3%................................. x .0333
Withholding amount...............................$66.66 (rounded to $67)

Enter $67 as the amount withheld on Form 593, line 5.

Example 3: The final payoff amount in escrow

The seller or transferor is making the final payoff payment of $2,500. The $2,500 consists of $2,100 principal and $400 interest. Using the information provided, we determined the amount due by applying the total sales price method.

Final escrow payment......$2,500
Less interest......................($400)
Final principal payment....$2,100

Final principal payment.....$2,100
Multiply by 3 1/3%............. x .0333
Withholding amount..........$69.93 (rounded to $70)

Optional Gain on Sale Election Method (Alternative Withholding Method)

Apply this method to calculate the withholding amount using the maximum tax rate that applies. To complete the calculation, you will need the withholding rate, monthly principal payment amount, and the Installment Withholding Percent.

Example 1: Subsequent payments after escrow

Withholding rate: 12.3%
Monthly principal payment: $1,500
Installment Withholding Percent: 25%

Principal portion of installment payment.........................................$1,500
Multiply by Installment Withholding Percent (also on Form 593-I)....... x 25%
Installment sale amount requiring withholding...................................$375

Installment sale amount requiring withholding....................................$375
Multiply by Maximum Tax Rate based on entity type........................ x 12.3%
Total withholding amount due.........................................................$46.13 (rounded to 47)

Enter $47 as the amount withheld on Form 593, line 5.

Example 2: Subsequent payments after escrow when the installment withholding percent is unknown

Property sold for $700,000
Estimated gain of $350,000
Withholding rate of 12.3%
Monthly principal payments of $1,500
Installment withholding percent: Unknown

To determine the installment withholding percent, you can either find it on Form 593-I, Part II, or calculate it as follows:

Estimated gain on sale (also from Form 593-E, line 16)..........................$350,000
Selling price (also from Form 593 E, line 1)......................................... ÷ $700,000
Installment sale withholding decimal ........................................................... = .500

To convert decimal to percent, calculate as follows:
Insert installment withholding decimal............................... .500
Multiply by 100....................................................... x 100
Installment Withholding Percent............................. = 50%

To compute the installment sales amount requiring withholding, calculate as follows:

Principal portion of installment payment........................................................$1,500
Multiply by Installment Withholding Percent (also from Form 593-I)............... x 50%
Installment sale amount requiring withholding............................................. = $750

Then, to compute the total withholding amount due as the amount withheld, calculate as follows:

Installment sale amount requiring withholding................................................$750
Multiply by Maximum Tax Rate based on entity type................................... x 12.3%
Total withholding amount due..................................................................... $92.25 (rounded to $92)

Round $92.25 to $92 and enter 92 as the amount withheld on Form 593, line 5.

Payment Options

You have the option to make annual, quarterly, or monthly withholding payments. In the example above, you are required to withhold $92 on the monthly principal payment. The following two examples show how to calculate the amount due on a quarterly or annual basis.

Quarterly

Monthly withholding amount.......................................$92
Multiply by the number of payments for the period..... x 3 payment periods
Total quarterly withholding due................................$276

When to Pay the Withholding Quarterly

To pay the installment sale withholding quarterly, withhold the 3-month amount and mail it to us with Form 593-V by the 20th day following the first month of the quarter. For example, if you use a fiscal calendar year, the second quarter is April-June. The 20th day following the first month of the quarter is May 20. When you pay the withholding amount to us, write on Form 593-V “quarterly payment.”

Annually

Monthly withholding amount............................................$92
Multiply by the number of payments for the period:....... x 12 payment periods
Total annual withholding due......................................$1,104

When to Pay the Withholding Annually

To pay installment sale withholding annually, withhold the total amount and mail it to us with Form 593-V by the 20th day following the first month of the calendar year. For example, if you use a fiscal calendar year, the withholding would be due February 20. When you pay the withholding amount to us, write on Form 593-V “annual payment.”

Elect out of subsequent installment payment withholding

Sellers or transferors can elect to not report the sale on the installment method. If you choose not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. To do this, you must:

  • File a California tax return and report the entire gain on Schedule D-1, Sale of Business Property.
  • Submit to us a written request to release the buyer from withholding on subsequent installment payments after filing your tax return and reporting the entire gain.
  • We approve or deny the request within 30 days from when we receive it. The buyer must continue to withhold until we approve the request.

See FTB 4010, Withholding on California Real Estate Installment Sales, for additional information.

A qualified intermediary (QI) or accommodator is an individual or business entity that facilitates an Internal Revenue Code (IRC) section 1031 deferred like-kind exchange.

Withholding Requirements

In a deferred exchange, the QI is required to:

  • Withhold. It is the QI’s obligation to withhold and not the obligation of the real estate escrow person (REEP).
  • Complete the withholding forms.
  • Remit the withholding.
  • Retain withholding forms for five years.

When a QI is Not Required to Withhold

A QI is not required to withhold when the transferor meets at least one of the following exemptions:

  • Certifies (completes and signs) on Form 593-C (Part II, any of the full exemptions, check boxes 1-9). Withholding is not required, even if there is boot or if the exchange fails.
  • Certifies (completes and signs) that the transaction is a deferred exchange on Form 593-C, Real Estate Withholding Certificate (Part III, check boxes 10 or 11). However, withholding is required if there is boot (cash, property, or liability) or if the exchange fails.
  • Is a corporation or partnership with a permanent place of business in California (R&TC section 18662(e)(1)). Withholding is not required, even if there is boot or if the exchange fails. Note: Unlike an exemption from withholding according to a certified Form 593-C, a QI which incorrectly determines that a corporation or partnership is exempt from withholding may be subject to applicable penalties.

Methods for Withholding in the Case of Boot

If the transferor has boot in excess of $1,500 and no other exemption applies, the QI or accommodator must use one of the following methods to withhold:

  • Boot in excess of $1,500: Withhold 3 1/3% (0.0333) of the boot in excess of $1,500.
  • Alternative Withholding Calculation Method: Use this method if the transferor elects to calculate withholding based on the certified amount of gain on sale completed on Form 593-E. This election also requires the transferor to provide the QI with a certified Form 593.

Methods for Withholding in the Case of a Failed Exchange

If the exchange fails and no other exemption applies, the QI or accommodator must use one of the following methods to withhold:

  • Total Sales Price: Withhold 3 1/3% (0.0333) of the total sales price.
  • Alternative Withholding Calculation Method: Use this method if the transferor elects to calculate withholding based on the certified amount of gain on sale completed on Form 593-E. This election also requires the transferor to provide the QI with a certified Form 593.

Withholding Penalty

A QI or an accommodator in a deferred exchange has a withholding obligation and is subject to penalties for failure to withhold. As a QI or accommodator, you must withhold when boot is paid in excess of $1,500 or the exchange fails. Any QI who fails to withhold is liable for the greater of:

  • Five hundred dollars ($500).
  • Ten percent of the required withholding.

Fund Shortage Requirements When an Exchange Fails

The QI’s withholding obligation requires the QI to remit the full withholding amount, even if the QI doesn’t receive sufficient funds from escrow. A QI who fails to remit the full amount of withholding required remains subject to a withholding penalty.

When the QI doesn’t receive sufficient funds from escrow to pay the withholding, the withholding penalty may be abated based on reasonable cause. A strong factor to support a reasonable cause determination would be if the QI provides contemporaneous evidence that the QI submitted a written demand to the transferor at the time the withholding is due to require the transferor to remit the amount of any shortage.

References

Real estate withholding is required on a trust unless the trust can qualify for an exemption on Form 593-C.

There are two types of trusts; a grantor and a non-grantor trust.

A grantor trust is a trust where the grantor (the person who transferred property into the trust) retains the right to cancel or revoke the trust. For tax purposes, a grantor trust is disregarded and the grantor (usually an individual) must report a real estate sale and claim the withholding on their individual tax return. Typically family trusts and living trusts are grantor trusts.

Withholding is required on a grantor trust unless the grantor qualifies for an exemption. Complete Form 593 using the individual's (grantor’) information.

A non-grantor trust is an entity separate from the grantor for all tax purposes. The seller is the trust and withholding is required. Complete Form 593 using the name of the trust and the trust's FEIN. Do not use the trustee’s individual information.

If the trust distributes the income from the gain on the sale of real estate, the trust must file Form 592, Resident and Nonresident Withholding Statement, to allocate the related withholding credit to the beneficiary.

To view our prerecorded webinars, you must register for each webinar separately.

Withholding forms go to Nonwage Withholding Forms and Publications page.

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Last Updated: 12/11/2017

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