mistakes on real estate transactions
Avoid costly mistakes when withholding tax on real estate transactions
California resident real estate withholding, implemented in January 2003, is one of the newer ways to address the tax gap. Real estate withholding is a prepayment of tax due to the state, ensuring that the taxes due on real estate sales are paid.
California law requires the buyer to withhold three and one-third percent of the total sales price on California real property sales, unless the seller meets an exemption to the withholding requirements, or FTB authorizes a reduced rate.
A study completed by the IRS in 1996 indicated that taxpayers are more likely to voluntarily report income on tax returns when they are subject to withholding and income information reporting. When information reporting and withholding occur at the same time a taxable event occurs, such as a sale of real property, there is a dramatic, positive effect on the tax compliance rate.
Many of you have resident and nonresident clients who will be subject to real estate withholding during the upcoming calendar year.
We have assembled a list of the most common errors on real estate documents (forms FTB 593 and FTB 593B). Awareness of these common errors should help you and your clients avoid misapplied payments, incorrect withholding amounts, or delayed refunds.
Social security number is missing or incorrect:
- Verify that the correct social security number is listed so that we give credit for withholding to the correct taxpayers when they file their tax returns.
Withholding form 593B shows trust information/FEIN for the seller:
- Many properties are sold under a trust. If the trust's Federal Employer Identification Number (FEIN) or name is on the form 593B, the withholding must be distributed from the trust to the recipients using nonresident withholding documents: forms FTB 592 and 592B (/forms/05_forms/index.asp).
Two names are on the form 593B, but only one social security number is listed:
- When two names are listed on the form 593B, we allocate the withholding between the two listed parties, regardless of whether there is a social security number for both taxpayers. If both taxpayers are not entitled to the withholding credit, the escrow officer should prepare an amended form 593B to remove the person not entitled to the credit.
Claiming withholding without the form 593B:
- When you have clients who sell real property, please make certain the form 593B is attached to their tax returns. We cannot allow the real estate withholding credit based solely on a closing escrow statement.
We hope these tips will help prevent misapplied payments or credits when you file your clients' 2006 tax returns. For more information, please see Real Estate Withholding Guidelines, FTB Pub. 1016, or call the Withholding Services and Compliance Section at (888) 792-4900.