California law requires real estate withholding whenever a transfer of title on California real property occurs. Transfers include, but are not limited to:
- Sales or transfers of real property (including gifts and exchanges)
- Short sales
- Personal property sold with real property (if not stated separately)
- Vacant land
These are key definitions of terms used relating to real estate withholding:
- Buyer refers to the buyer or any other transferee of real property.
- Seller refers to the seller or any other transferor of real property.
- Real estate escrow person (REEP) refers to any attorney, escrow company, or title company responsible for closing the transaction, or any other person who receives and disburses payment for the sale of real property.
- Qualified Intermediary (QI) refers to the entity that facilitates a deferred like-kind exchange. A QI is also known as an accommodator or buyer.
California Code makes the buyer responsible for ensuring withholding is collected and remitted at the time of the sale. Settlement agents are always responsible for providing a notice to the buyer and seller. The notice states:
"In accordance with Section 18662 of the Revenue and Taxation Code, a buyer may be required to withhold an amount equal to 3 1/3% (.0333) of the sale price, or an alternative withholding calculation amount certified by the seller in the case of a disposition of California real property interest by either:
- A seller who is an individual, trust, or estate, or when the disbursement instructions authorize the proceeds to be sent to a seller's financial intermediary.
- A corporate or partnership seller with no permanent place of business in California immediately after the transfer of title to the California property.
The buyer may become subject to penalty for failure to withhold. The penalty is an amount equal to the greater of 10% of the amount required to be withheld or five hundred dollars ($500).
However, notwithstanding any other provision included in the California statutes referenced above, no buyer will be required to withhold any amount or be subject to penalty for failure to withhold if:
- The sale price of the California real property conveyed does not exceed one hundred thousand dollars ($100,000).
- The seller executes a written certificate under the penalty of perjury certifying that the seller is a corporation or a partnership with a permanent place of business in California.
- The seller, who is an individual, trust, estate, partnership, or a corporation without a permanent place of business in California, executes a written certificate under the penalty of perjury of any of the following:
- The California real property being sold is the seller's or decedent's principal residence (within the meaning of Section 121 of the Internal Revenue Code [IRC]).
- The last use of the property being sold was by the transferor as the transferor's principal residence (within the meaning of IRC Section 121).
- The California real property being sold is, or will be, exchanged for property of like-kind (within the meaning of IRC Section 1031), but only to the extent of the amount of gain not required to be recognized for California income tax purposes under IRC Section 1031.
- The California real property has been compulsorily or involuntarily converted (within the meaning of IRC Section 1033) and the seller intends to acquire property similar or related in service or use so as to be eligible for nonrecognition of gain for California income tax purposes under IRC Section 1033.
- The California real property transaction will result in a loss or net gain not required to be recognized for California income tax purposes."
REEPs often accept written instructions from the transferor and transferee to remit the withholding and forms to the California FTB on their behalf but doing so does increase their liability. The FTB assesses a penalty for failure to file complete, correct and timely information returns. Late filings are subject to the following amounts:
- $30 if filed 1 to 30 days after the due date.
- $60 if filed 31 days to 6 months after the due date.
- $100 if filed more than 6 months after the due date.
The FTB assesses a penalty for failure to furnish complete, correct and timely copies of the filed forms to the seller or transferor by the due date. The penalty is $100. Any person, including the buyer and REEP, who intentionally disregards the filing or correct information reporting requirements may be assessed a fine of the greater of $250 or 10%. When the REEP fails to withhold they are liable for the greater of $500 or 10% of the amount required to be withheld.
The Withholding Services and Compliance Section of the FTB handles withholding. The phone number is 888.792.4900. Always refer to the FTB website for specific instructions and forms and for any updates:
The information provided herein does not, and is not intended to, constitute legal advice; instead, all information, and content, in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Fidelity National Title Group does not recommend or endorse the contents of the third-party sites.
Article provided by contributing author:
Diana Hoffman, Corporate Escrow Administrator
Fidelity National Title Group
National Escrow Administration