who is liable for the withholding on the sale of a property owned by a foreigner? This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you Part 1 of California’s Withholding on Sale of Real Estate- What, Why, Who, When and How. Following along are instructions in the video below:
This is juliana i talked about the federal withholding law. The frigde in my other other video presentations did you know that the state of california also has a law withholdings. Which is separate from the federal law.
When i tell my sellers. This this is either a aha moment or an uh. Oh moment so today i am going to talk about the withholding requirements for the state of california lets go ahead and get right to it before i do so let me go ahead and go through the disclaimer with you the information contained in this video is only intended to provide a guide to the various transactions to which the information is applicable no representation is made as to the legal validity of the information or the adequacy of it in any specific transaction.
The information contained should only be used after consultation with legal and financial counsel so what is this withholding california code of regulations title 18 sections 18 660 2 0. At all states that all real estate. That is held in california once it is sold requires.
This withholding and the withholding amount is going to be three point three three percent of the sales price for the state law. The prepayment of income taxes is very important so when you sell a property in the state of california. Youre going to need to pay taxes on your profit.
So the california franchise tax board is going to be the collector and the monitor of this law and any seller has the obligation to pay these taxes on the property before he goes out of state or before he leaves the country. The escrow agent must at that time turn in a government 593 form that is collected on every real estate transaction and if theres withholding the money gets turned in at that time youre thinking. Wow.
That is a lot a hundred thousand transactions a year. Yes. There is a lot of transactions in california.
But there are exemptions that the sellers can take can avail themselves of some of the common exemptions that can be used are as follows. If the sale price is 100 thousand or less that there is no withholding at all its automatically exempt now the one that we use the most is the principal residence exemption. If the seller has used the property as his principal residence for at least two out of the five years prior to the sale then it is going to be exempt.
If theres a loss if the seller has a loss or a zero gain. That is also going to be an exemption. But he does need to fill out part six of that 593 form.
Now if this is a corporate entity seller. Now thats a seller whos a corporation and llc or a partnership and they are qualified and registered to do business in california. It has a permanent rest place of business in the state.
Then they are also exempt. However they cannot be a single member entity. Meaning that the ownership of this corporation or llc or partnership is one person.
Only that will not qualify them if the seller is going to be placing all of the net proceeds that he gets from this sale into the purchase of another income property under the irs 1031 tax deferred code. Then hell be exempt. However he needs to understand that if not all the funds that he gets from the sale is used for the purchase.
Then the withholding is going to take place on the funds that are not used if the seller is going to be doing an installment sale in which the sellers actually blending part of the money of his net proceeds to the buyer as a loan then the buyer will be paying him in monthly installments in the future. An installment sale can also qualify for an exemption. Except that its a little different the first part of the withholding is actually done at the closing.
When theres a sales price. And you subtract off the loan that youre giving to the buyer you come up with the equity part of it this. Equity part of it is going to need the withholding of 333.
Percent. Then as the months go through and the buyer pays the seller back and monthly payments every time they make a bun philippe amon that principle that theyre paying off means the three point three three percent withholding on that amount before the seller gets the balance. So if you have an installment sale sale.
I would very strongly urge that you talk to your escrow agent and make sure that you understand all the ramifications of this installment sale and the withholding now how do we calculate on the withholding the straight out withholding is three point three three three percent of the sales price. If however the seller feels that his potential gain is going to be less than that amount he can do an alternative withholding and he has to complete part. 6 of the five ninety three form.
He will put in the sales price. Hell put in the selling expenses and then hell put in the purchase price that he did that he had of the property. Hell put in all of the repairs.
All the money that he puts in and then he will calculate this when you have the sale price. And you subtract the purchase price youre going to get an estimated gain or loss on number twenty eight line twenty eight. If it shows a loss then theres going to be no withholding if line.
28 shows a gain a positive number then they will have to click the alternative withholding calculation amount and charge and get charged twelve point three percent of that amount on line 28. Now after you complete all this and give this to thee to the escrow agent. Please be sure that you contact the cpa on how you calculated it because as you know youre going to be doing the income tax return.
And if your cpa is going to help you at the end of the year. Hes going to need to see all these figures that you have submitted tax identification. Numbers.
I mentioned this in the in the frigde presentation in california. Withholding law. If the seller does not give.
Or does not have a social security. Number or an individual tax identification. Number.
The none of those exemptions are going to be. Allowed we are going to withhold 333. Percent of that sales price.
However the seller can still do the alternative withholding amount. But think about it if you let the state. Let the state take away the alternative withholding amount and you dont give them a tax id.
Number. Where are they going to put the money so youre going to need to with declare income tax on your tax on your taxes. And youre going to need to give them the tax id.
Number. At the closing. So that they can properly put your alternative withholding amount in to your tax id number for your income tax reporting.
When do you claim them withholding well first of all the funds are going to be sent by your escrow agent to the franchise tax board. No later than the twentieth day of the month after the month. That the transaction has closed the escrow agent will provide the seller with all copies of the documentation that they sent in and the well then attached documentation.
These documentation to their income tax return. If too much withholding was made then the overpayment is going to be returned by the franchise tax book. If theres not enough then the seller is gonna have to pay the difference let me give you some fun facts on this withholding from the franchise tax board.
First of all this withholding applies to all sellers of california real estate. Whether you live in the state or not whether youre a foreigner whether you are a resident whether youre a non resident. It applies to everybody there are exemptions that you can you can avail yourself of with from this withholding.
But you have to have a social security. Number or a tax identification. Number.
Number three. An llc has a special qualification. If you are a single member llc meaning.
Theres only one individual that owns this llc then you cannot qualify for the llc entity exemption. Theyre going to look at you as a individual you can use the alternative withholding calculation. Because you might only need to pay a lesser amount.
So go ahead and try the alternative withholding first if the seller has completed the 593 form and they willfully made a false statement. Then they are going to be in a little bit of trouble because the form is signed under penalty of perjury. This form is sent to the franchise tax board by the escrow agent.
So they will have that form in which you sign and you declared number five. If the seller is giving a loan to the buyer from his proceeds then the seller and the buyer is going to need help from the escrow agent to figure out how to pay so be sure you contact your escrow agent at that time okay today. My escrow officer t shirt.
Says. I may be wrong. But i highly doubt it as you can see this is my escrow officer t shirt.
We dont take ourselves very seriously. We escrow officers. We like to have some fun in life too so thank you for watching.
This is julianna. I hope that you will like me i hope that you will be sure to subscribe and im gonna have part two of the california withholding come out it has two deals with questions and answers that you might have so be sure that you tune in thank you for your time. .
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