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Effective January 1, 2020, the state of California has made changes to their 593 reporting and income tax withholding requirements that have important implications for relocation home sale transactions. Previously, the only transactions that were reported to the California Franchise Tax Board (FTB) were those that required state income tax withholding. Now, EVERY real estate transaction with a sales price over $100,000 will have to be reported to the FTB, whether or not the transaction is exempt from state income tax withholding.
These changes were announced in early December. However, the state has not yet released complete guidelines, nor have they updated all their publications. It has also been very difficult to get consistent information from the FTB regarding reporting for transactions not subject to withholding, which is the majority of relocation transactions. The FTB is still working on implementation procedures to deal with the increasing number of transactions this new policy entails.
The new Form 593 can be viewed via this link: https://www.ftb.ca.gov/forms/2020/2020-593.pdf. A link to the current instructions is https://www.ftb.ca.gov/forms/2020/2020-593-instructions.html. Publication 1016, Real Estate Withholding Guidelines, has not yet been updated for 2020.
In years past there were several 593 forms used for different withholding and reporting issues. In an effort to simplify the process, the FTB has combined all the previous versions of the 593 (C, E and I) into a single Form 593. This form or an electronic equivalent utilizing a SWIFT account (discussed later), must be sent to the FTB on every real estate transaction. Please note, reporting is required on every real estate transaction that occurs when consideration of more than $100,000 is exchanged for interest in real property; reporting is not based on how many deeds are recorded.
Since there are two transactions in a single relocation real estate transaction (the first from the transferee to the relocation management Company (RMC) and the second from the RMC to a bona fide purchaser), both will now need to be reported to the FTB. The reporting on the first transaction should be made by the RMC or their equity preparation provider. That entity will be the real estate escrow person (REEP) who is shown in Part I of the Form 593. Reporting on the second transaction will be made by the escrow/title company who is handling the resale closing from the RMC to the bona fide purchaser.
Reporting to the FTB must be made by the 20th day of the calendar month following the month of acquisition or closing. Reporting the acquisition of the property from the transferee may happen in a month prior to the resale closing to a bona fide purchaser. For example, if the transferee’s prorate date is January 28, 2020 and the resale closing date is February 3, 2020, the Form 593 for the acquisition must reach the FTB by February 20 and the Form 593 for the resale closing must reach the FTB by March 20. There are penalties for failure to report the information within these time frames.
The same exemptions from income tax withholding may apply to the transferee as with the previous Form 593-C, the most common being that the property qualifies as their principal residence or was last used as their principal residence (See Form 593, Part III, items 1 or 2). As in the past, if neither of these exemptions applies or if there is a loss or zero gain for California income tax purposes, they will need to complete an additional section (Form 593, Part VI) to calculate the reduced withholding or show no withholding is due.
For the second transaction where the RMC is the seller, the RMC may qualify for an exemption if they are a corporation (or LLC classified as a corporation) qualified through the California Secretary of State or have a permanent place of business in California (See Form 593, Part III, item 6). If this does not apply, the RMC will need to complete an additional section (Form 593, Part VI) to calculate withholding. Information to be reported in this section includes the purchase price of the property (from the transferee), the sales price of the property (to the bona fide purchaser) and any costs of sale (e.g. real estate commission). Once the real estate commission is subtracted as a cost of sale, the transaction will typically be a loss, which would result in no income tax withholding.
An additional consideration when reporting the transaction from the transferee to the RMC is that if there are two owners (e.g. husband and wife), and if they file their state income taxes separately, then each will need to complete a separate Form 593, thus creating two Form 593s for the same transaction. This may also be a consideration if there are multiple owners (e.g. parents) or if there is a pending or completed divorce situation.
The instructions for Form 593 do not differentiate between sales requiring withholding and those that are exempt from withholding. The FTB instructions state that the completed Form 593 is to be sent to the seller (the transferee at acquisition and the RMC at resale closing) at the time of acquisition/closing and it is subject to the same time period as reporting the information to the FTB. If mailing the forms to the FTB, the exact address provided in the Form 593 Instructions is:
Witholding Services and Compliance MS F182 Franchise Tax Board PO Box 942867 Sacramento CA 94267-0651
If mailing the forms and there is no withholding, the FTB will accept a copy of the Form 593. They will also accept a copy of a Form 593 signed via verified electronic signature (e.g. DocuSign). An RMC may contact the FTB to set up a Secure Web Internet File Transfer (SWIFT) account to report the transactions electronically and eliminate the monthly mailing. The contact phone number is 916-845-3778.
The FTB is still defining their processes and determining how to handle some situations. As more specific information affecting relocation transactions is available from the FTB, it will be disseminated to the membership.
Old Republic Relocation Services is not a tax consultant. Please consult appropriate tax counsel for guidance on any tax matter.
Linda Hargreaves is senior vice president of Old Republic Diversified Services and general manager of Old Republic Relocation Services.
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