Taxation in California for investment property

[Account Closed]

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

[Bill Exeter]

Originally posted by @Account Closed:

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.