California Proposes Changes to Consolidate Real Estate Withholding Forms

The California Franchise Tax Board has proposed changes to its regulations that would, among other things, consolidate the five forms currently in use to implement (or avoid) withholding on sales of California real estate by nonresidents into one form.  See the proposal.

In 1990, California was the first of what are now some 16 states that impose withholding on sales of real estate by nonresidents.  The statutes are modeled on the federal Foreign Investment in Real Property Tax Act (FIRPTA).  

Effective July 31, 1990, Sections 18662 and 18668 of the California Revenue and Taxation Code imposed withholding of 3 1/3% of the sales price of a California real estate property interest by a nonresident individual or by a corporation that does not have a permanent place of business in California. A corporation has a permanent place of business in California for this purpose if it is a California corporation, or is registered to do business in California, or maintains and staffs a permanent office in California. In 2002, the statute was amended to apply also to resident individuals, who were made subject to it beginning with escrows closing after December 31, 2002.

Property sold for $100,000 or less is exempt. Individuals are exempt if they are selling their principal residence. A change in the law in 2005 made such individuals exempt even if they do not meet the two-year ownership and use rules of section 121 of the Internal Revenue Code, if the property was last used as their principal residence. There is also an exemption if the seller certifies that there is no gain on the sale by completing and filing Forms 593C and 593E.

In 2006, the California law was again amended to eliminate chronic over-withholding in cases in which there is a gain, but the tax would be considerably less than 3 1/3% of the sales price. Under the amendment, at the election of the seller, withholding may be limited to an amount computed at the highest tax rate times the gain on the transaction.  The seller must certify to the amount to be withheld under penalties of perjury.  

Form 593 must be filed with the Franchise Tax Board.

As noted, California uses several different forms to implement the withholding regime.  These include separate forms to claim exemptions, to calculate either regular or alternative withholding amounts, and to report transfers.

The proposed regulations aim to reduce the inefficiency and confusion this creates by consolidating all current forms into a single California Form 593.  This would be a welcome development for companies doing business in California, as well as sellers of residences there.  

The Franchise Tax Board has offered to hold hearings, but has not done so yet, and it is not clear when the revised regulations would go into effect.  However, the state is aiming for a completed revision in 2019.

How This Impacts Mobility

Companies buying and selling homes in California, as well as individual sellers of California homes, will benefit from the simplification of the withholding and reporting process.

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