2003 CALIFORNIA WITHHOLDING LAW

California Real Property Tax Withholding formerly applied only to out-of-staters. A new law just signed (10/02) by the Governor makes it apply to any seller (effective 2003), unless an exception applies.

First of all remember that withholding is not terrible. Most people have taxes withheld from their paychecks, and get credit for it next year when they file their Tax Returns.

Effective 1/1/2003, 3.33% withholding will be required for ANY SELLER of California real estate unless it meets an exception. There are 4 exceptions:

1. Property Sales Price is under $100,000
2. Sale of a Personal Residence
3. Like Kind Exchange (§1031)
4. Installment Sale (where the Seller carries back the mortgage)

If these exceptions do not apply, the Buyer (actually, it will be the Escrow Company, acting for the Buyer) must withhold and send to the State 3.33% of the sales price.

Examples:

• Sam sells his home. The sale of a personal residence is a qualified exemption. No withholding.

• Sam sells his rental or vacation home for $300,000. The State of California demands withholding of $10,000. When Sam files his State Income Tax Return next year, he gets credit for $10,000 pre- paid tax; he gets that back unless he owes State taxes for some other reason.

• If Sam sells for $300,000 but bought for $290,000, his State Tax might be 9.3% of the $10,000 profit (less than $1,000). But they must withhold $10,000.

The Application for Reduced Withholding will NOT be available for sellers in this circumstance.