California Withholding

In 2003 California amended its real property tax law such that 3.33% of the property SALE price must be withheld buy the buyer. This applies to all individual buyers unless an exemption is applicable. Fortunately, numerous exemptions exist. These exemptions are different depending on whether the seller is an individual or an "entity" such as a trust, corporation, LLC, etc. The exemptions are noted below:

When the seller is a real individual person, the buyer is exempt from withholding if:

  • The property sales price is less than $100,000
  • The sale is of a personal residence
  • It is a "Like Kind" or 1031 Exchange
  • It is an involuntary conversion (IRC 1033)
  • The sale results in a loss for CA income tax purposes
  • It is an installment sale

When the seller is an entity and the sales proceeds are to be transferred to an address outside of California, the buyer is exempt from withholding if:

  • The property sales price is less than $100,000
  • The buyer does not receive written notification of the withholding requirement from the "real estate escrow person."
  • The seller is a bank acting as trustee (other than under a deed of trust)
  • The property is acquired by a corporate beneficiary under a deed of trust or mortgage through judicial or nonjudicial foreclosure or by a deed in lieu of foreclosure
  • The seller is a partnership, LLC, tax exempt entity, insurance company, IRA or qualified pension plan
  • The seller is an irrevocable trust with a California trustee
  • The seller is a California corporation

Note that effective Jan. 1, 2007, an alternative withholding option will exist for sellers who are currently required to have 3.33 percent of the sales price withheld for income tax purposes. The alternative withholding is an estimate of the seller's tax liability calculated by multiplying the recognized capital gain by the highest state tax rate for individual taxpayers (or the corporate tax rate for corporations), regardless of the taxpayer's actual tax bracket. The new law applies to non-exempt sellers and may be a way to have less than 3.33 percent withheld.