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Real Estate Installment Sales

This is a property sale where the seller receives at least one payment after the tax year of the sale.

Withholding requirements

We require buyers to withhold on the principal portion they receive in escrow and each installment payment they make to the seller when they buy California real estate on an installment basis. We require this to match the withholding credit to the income the seller reports on their income tax return.

We do not require withholding:

  • If other exemptions apply, see Form 593-C, Real Estate Withholding Certificate.
  • On the installment payment’s interest portion.

How to calculate installment payment withholding

You can calculate the withholding amount with either the Total Sales Price Method or the Alternative Withholding Calculation certified on Form 593.

Total Sales Price Method

Withhold 3 1/3 percent on each installment payment’s principal portion.

Example 1: Initial payment due during escrow

  • The property’s total sales price is $300,000.
  • The buyer pays $150,000 at sale’s time.
  • Send us the withholding of $4,995 ($150,000 x .0333 = $4,995).
  • Send the seller $145,005 ($150,000 - $4,995)

Example 2: Subsequent payments after escrow

  • The buyer pays the seller $2,000 monthly principal payments.
  • The withholding is $66.60 ($2,000 x .0333 = $66.60).
  • Send us the $66.60 withholding
  • Send the seller $1,933.40 ($2,000 - $66.60) principal payment plus interest

Alternative withholding calculation

Refer to the instructions in Form 593, Real Estate Withholding Tax Statement.

Buyer information

During escrow

  • Complete and sign Form 593-I.
  • Calculate the withholding amount with the Form 593’s instructions.
  • Withhold on the required first installment payment you receive in escrow.
  • Submit to the Real Estate Escrow Person (REEP):
    • Form 593-I.
    • Copy of the promissory note.
    • Amount you withheld. The REEP sends it to us.

The promissory note must include:

  • Principal amount.
  • Installment amount.
  • Interest rate.
  • The repayment period’s length.

After escrow

Continue to withhold on all subsequent installment payments. Before you send the seller each payment, you must:

  • Calculate the withholding amount with the Form 593’s instructions.
  • Send it to us with Form 593-V and Form 593 by the 20th day of the month that follows the month you pay the installment.
  • Send the seller a copy of Form 593 by the 20th day of the month that follows the month you pay the installment.

If the installment payment is the last one, write “Final Installment Payment” on the bottom of Form 593.

Write to us any time the following items change:

  • Installment sale’s or promissory note’s terms
  • Payment schedule.

Real Estate Escrow Persons information

Mail us:

  • The complete, original, Form 593-1.
  • A copy of the promissory note.
  • The seller’s or transferor’s certified Form 593.
  • Form 593-V with first installment payment’s withholding amount.

After the buyer sends you the:

  • Form 593-I
  • Promissory note
  • Amount withheld

The Real Estate Escrow Person must keep copies of these forms in their records.

Seller information

  • File the appropriate California tax return.
  • Report the installment sale income.
  • Claim the related withholding credit in each taxable year that you receive installment payments.

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.

Withholding forms go to Nonwage Withholding Forms and Publications page.

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Last Updated: 07.13.2018

 

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