Taxation in California for investment property

9 Replies

I once lived in CA and in 1988 I bought a small 2 BR in a working class neighborhood. I have not lived in CA for 15 years. I sold the house this year and there was huge appreciation. The escrow company is insisting that I sign a Real Estate Withholding Certificate and that I must pay a state tax on this.

Is this true?

Kathie

I had to do the same thing circa 2004 and, as I recall, I did the tax form and then had to negotiate some with them for a year or two and was working on the phone with people that did not really understand capital gains or adjusted basis or even capital improvements versus expenses or depreciation..a bit frustrating... Long story short, the person literally said just send us x dollars (more of a settlement than anything)..so they collected it but did not seem to have a high degree of expertise about the capital gain topic at that time....you might use an expert who can help minimize the federal and state tax burden if possible... Be it 1031 or other strategy... Best of luck....

SALES tax is collected at COE - - GC is not paid until the following April 15th.

Just like vetting a tenant, partner or contractor, you MUST also vet the attorney/escrow agent for familiarity with commercial closings :sigh:

Originally posted by @Kathie Riedel:

I once lived in CA and in 1988 I bought a small 2 BR in a working class neighborhood. I have not lived in CA for 15 years. I sold the house this year and there was huge appreciation. The escrow company is insisting that I sign a Real Estate Withholding Certificate and that I must pay a state tax on this.

Is this true?

Kathie

I thought I would weigh in here and help clarify the withholding requirements imposed by the State of California. 

California has a Franchise Tax withholding requirement.  The withholding requirement is generally 3 1/3 percent of the gross sale price.  There is also an alternative if the 3 1/3 percent would result in over withholding.  There are also exceptions to the withholding requirement.

The escrow company is requesting that you complete California Franchise Tax Board ("FTB") Form 593 C and possibly FTB Form 593 E.  This is the withholding certificate that will help determine if you are exempt from the FTB withholding or if the escrow company will be required to withhold.

The most common withholding exemptions are the sale of your primary residence if you qualify for the tax-free exclusion under Section 121, exchange of rental/investment property if you qualify for tax-deferred treatment under Section 1031, or if you are a corporation, partnership or other entity that is not disregarded for income tax purposes.

If you do not qualify for one of the exceptions, the escrow company is required to withhold at the 3 1/3 percent rate or the alternative rate.  It is not a tax, but an estimated payment toward your California income taxes that might be owed.  It is essentially just like the withholding through your paycheck except that it is based upon the sale of your real property.  You will get a refund of the amount paid if you owe no California income taxes upon the filing of your California income tax returns.

yes, and your main issue is the gain from the sale, a California source, so you will have to do your California state taxes, too, even though not a resident for the sale of the rental property.....where I was at ten years ago....best of luck

Originally posted by @Kathie Riedel:

I once lived in CA and in 1988 I bought a small 2 BR in a working class neighborhood. I have not lived in CA for 15 years. I sold the house this year and there was huge appreciation. The escrow company is insisting that I sign a Real Estate Withholding Certificate and that I must pay a state tax on this.

Is this true?

Kathie

 Yes, unless you do a 1031 exchange.  I moved from California as the franchise tax board is worse than the IRS.

Mark

@Bill Exeter wow thanks for the clarification. I am also located in California. I have some other questions about items related to entity, 1031, and such. Are you open to connect, I'd love to  pick your brain for a quick 15-20 min :)