California State sales tax on property?

Question

I have a friend who is selling a condo in San Diego and they told me they are being hit with what they called a "State sales tax" that amounts to about 3% of sales price!

To be clear, this is something separate from capital gains tax, from the information I understood.

Having not operated in California, I can't speak to it, but it sounds absurd!

Is there any knowledge out there that enables avoiding this tax?

Any thoughts or tips are appreciated.

Thank you for your time.

-Sam

Ron Drake · Answer

They are talking about the Franchise Tax Board for Calfirpta withholding. It is 3 1/3% of the sales price for individuals on non principal residence. It doesn't apply to partnerships, corps or LLCs.

Daniella W. · Answer

And on that note, as a buyer in California, make sure to get a form called "FIRPTA" (Foreign Investment in Real Property Tax Act) or "QS" (Qualified substitute) through escrow to protect yourself from the tax liability!

Mercedes Cantero · Answer

I am a foreign investor in San Diego and I know that the buyer must withhold 10% of the price when I sale the house. Both foreign and non-resident of California must to comply with this tax obligation.

I agree with @Ron Drake. It is not an extra tax. It is a withholding of the future income tax, it works as prepayment and when we fill up the taxes we will include this amount to calculate the tax due.

Ron Drake · Answer

It is actually the state of California collecting state income tax. If you earn income you will pay income tax. California is just making sure you pay as this applies to out of country investors too and may be what inspired this tax. Since the withholding is based on the sales price without knowing what the profit actually is, when you file your tax return, If your gains on a property and subsequent taxes due were less than you paid you will get a refund.

Justin R. · Answer

Absurd, indeed.  Maybe they're talking about agent commissions, but there's definitely no sales tax.

The only other thing that could make sense is if they're talking about the state income tax on the *profit* from the sale.  Lots of variables, but if the CA income is low (less than ~$30k), the state-imposed marginal income tax on that sale is in the 2-4% range OF PROFIT (not sales price).

Daniella W. · Answer

Hi TK Lewis,

From the IRS website:

"In most cases, the transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax."

If you don't ask for these forms, you could potentially be liable for a foreign seller's tax liability. Escrow typically assists with this, but it's just something to be aware of and check off your list with a purchase.

TK Lewis · Answer

Please explain how acquiring those forms give you protection from tax liability?Thanks.

Marylou Antonio · Answer

Sam, I understand that the property tax in California is high but its not as high as Oregon. Also try to understand although the taxes are high the returns are high too. Therefore, its not as bad ok

Samuel DeMass · Answer

Thanks for all the input!  I appreciate it.  I was surprised that I was unable to track down a previous conversation concerning this.  Is this a norm in any other states?  I would love to find out.  Out of state investor be warned of California!

@Ron Drake seems to hit the concern square in the face.

I think I'll be staying away from putting any of my $$$ to work in California.  Good riddance.

I think it's a ridiculous tax.  However, to read more about it I've sourced it at the website below:

https://www.ftb.ca.gov/individuals/wsc/California_...

Cheers,

-Sam

Mark B. · Answer

The only way that I'm aware that someone could get hit with a Sales (or Use) tax on a property is if they are the builder and didn't pay sales tax on the materials they bought to build the building. To do that they would have to have a resale certificate. I'm not familiar with how that works as a builder, but if they went that route I would think/hope that would only pay the sales tax on the materials that went in the property and not the value of the land.

California State sales tax on property?

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