Real estate withholding law changes for 2007
On September 22, 2006, the governor signed AB 2962. This new law amends Revenue and Taxation Code Sections 18662 and 18668, making changes to real estate withholding requirements for all transactions closing on or after January 1, 2007.
Previously, where withholding was required, sellers had to withhold three and one-third percent of the property's sale price. Now, sellers may choose between the original withholding method, or elect an alternate withholding amount based on applying the maximum tax rate to the seller's estimated gain. The maximum tax rates are:
|• Individuals:||9.3 percent.|
|• Corporations:||8.84 percent.|
|• Banks and financial corporations:||10.84 percent.|
|• S corporations:||1.5 percent.|
|• Financial S corporations:||3.5 percent.|
We are creating form 593E, Real Estate Withholding - Computation of Estimated Gain or Loss to include an online calculator (see "Forms" section below) on our Website to help sellers calculate the amount of gain, and the alternate withholding amount.
Sellers electing an alternate withholding amount will be required to certify the amount in writing, under penalty of perjury.
Withholding agent responsibilities
The responsibilities of the withholding agent and real estate escrow officer have not changed. The withholding agent is still expected to provide certain forms to the seller and certain forms to the buyer, and then withhold accordingly. The real estate escrow officer is still required to provide written notification to the buyer. The escrow officer's notification to the buyer has been amended, however, to include language regarding the alternate withholding amount.
We have also created the FTB forms used to calculate, and to elect the alternate withholding amount. These forms state that title and escrow officers are not authorized to provide legal or accounting advice for the purposes of determining the withholding amounts, and that sellers should consult tax professionals for advice.
With new laws come new forms, and changes to existing forms. The forms for 2007 have not been finalized; however, we expect to have the forms available in mid-to-late December. All current forms are online and fillable.
The following changes are planned:
- Form 593-B, Real Estate Withholding Tax Statement. The escrow officer or withholding agent will continue to submit this form to FTB along with Form 593, Real
Estate Withholding Remittance Statement. In addition,
Form 593-B will be used to notify FTB of the seller's election, and the certified alternate withholding amount. If electing the certified withholding amount, the seller's signature is required on Form 593-B.
- Form 593-C, Real Estate Withholding Certificate. The seller will continue to complete, sign, and submit this form to the escrow officer, to claim a withholding exemption.
- Form 593-E, Real Estate Withholding - Computation of Estimated Gain or Loss. This form replaces
Form 593-L (described below), and will be used by the seller to calculate the loss or gain on the sale, and the reduced withholding amount. If claiming an exemption based on the loss calculation or electing the alternate withholding amount based on the gain, the seller is to complete, sign, and maintain this form for five years.
- Electronic Calculator Form (NEW) - In addition to the Form 593-E, we will have an electronic calculator on our Website that mimics the Form 593-E. The seller can use this form to calculate the loss and gain on the property, and the alternate withholding amount. When the form prints, it will print as a Form 593-E.
- Form 593-L, Real Estate Withholding - Computation of Estimated Gain or Loss. This form is discontinued and replaced with Form 593-E.
We do not anticipate significant changes to Form 593, Real Estate Withholding Remittance Statement or Form 593-I, Real Estate Withholding Installment Sale Agreement, except to include language relating to the alternate withholding amount.
- How does the seller elect to withhold on the
- The seller calculates the amount of gain and the alternate withholding amount on Form 593-E, Real Estate Withholding - Computation of Estimated Gain or Loss. If electing the alternate withholding amount, the seller completes, signs, and maintains the Form 593-E for five years.
- The seller must certify Form 593-B, Real
Estate Withholding Tax Statement, which the withholding agent submits to FTB, along
with Form 593, Real Estate Withholding Remittance
Statement, and the withholding amount.
- Who is responsible for completing and maintaining Form 593-E, Real
Estate Withholding - Computation of Estimated Gain or Loss?
The seller is responsible for completing Form 593-E, which assists in calculating the loss, or zero gain, and the alternate withholding amount. If claiming a loss, or zero gain, or electing an alternate withholding amount, the seller must complete and certify the form. The seller is to maintain the form for five years and furnish the form to FTB upon request. After completing this form, the seller must certify Form 593-B to elect the alternate withholding amount, and give the completed Form 593-B to the withholding agent.
- Is the seller required to complete, sign, and
provide the withholding agent with the completed
Form 593-C, Real Estate Withholding Certificate?
No. This form is to be completed only if the seller claims a full or partial withholding exemption. Under those circumstances, the seller must give a completed and certified Form 593-C to the withholding agent. Otherwise, the withholding amount will be either three and one-third percent of the total sale price, or the alternate withholding amount certified by seller on Form 593-B.
- Is the withholding agent responsible for verifying
the alternate withholding amount stated on
No. As long as the form is complete, and certified under penalty of perjury, no other verification is required.
- Is the seller required to provide the Form 593-E
to the withholding agent?
No. The seller completes, certifies, and maintains Form 593-E if claiming a withholding exemption due to a loss or zero gain on the sale, or if the seller elects the alternate withholding amount. The seller is to maintain the form for five years, and furnish the form to FTB upon request. If electing the alternate withholding amount, the seller must provide the withholding agent with a signed Form 593-B.
- In an installment sale, is the seller required to
sign Form 593-B for each installment payment submitted to FTB?
No. If the buyer elects to withhold on each installment payment, the buyer will be required to execute Form 593-I, Real Estate Withholding Installment Sale Agreement. Form 593-I must be submitted to FTB along with a copy of the signed promissory note (showing the installment payment requirements), and a copy of the seller's original certification of Form 593-B (which is submitted on the first payment in escrow or by the withholding agent). While a new Form 593-B must be completed and submitted with each installment payment, the buyer will not be required to obtain the seller's signature each time the buyer submits additional withholding payments.
We will update our Website, www.ftb.ca.gov (search for real estate), as new information, forms, and publications become available.