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Real Estate Withholding - Frequently Asked Questions


Estates and trusts

Are the terms "estate" and "trust" interchangeable under real estate withholding requirements?

No. The words estate and trust are commonly interchanged when referring to a deceased person’s property and possessions, but they are not interchangeable for withholding or tax purposes.

Withholding definitions:

Estate - The decedent’s total assets and liabilities at the time of death.

Trust - A legal entity created by a grantor under the laws of the state by a valid trust instrument for the benefit of designated beneficiaries.

Beneficiary - One who is lawfully entitled to the benefits of property, the title to which is vested in another, such as an executor or trustee.

Fiduciary - Any individual or organization responsible for the custody and/or administration of any person’s estate or trust property. For example: Guardian, trustee, executor, administrator, receiver, or conservator.

Trustee - An individual or organization that holds or manages and invests assets for the benefit of another.

Real estate escrow person - The person (including any attorney, escrow company, or title company) responsible for closing the transaction, or any other person who receives and disburses the consideration or value for the interest or property conveyed.

How should I treat grantor and nongrantor trusts?

  • A grantor trust is disregarded for tax purposes. The trust income and withholding payments must be included on the grantor’s tax return as if the trust didn’t exist. The grantor’s name and individual taxpayer identification number (ITIN) are used on all withholding forms. Generally, the social security number (SSN) of the grantor is used.
  • A nongrantor trust is a separate entity from the grantor for all tax purposes. The trust name and federal employer identification number (FEIN) are used on all withholding forms. Generally, the FEIN of the trust is used.

How do I determine when to withhold or when an exemption may be claimed?

Refer to form FTB 7429, Do I Need to Withhold on This Trust?

How do I determine the last use of a principal residence?

It is the property's use immediately preceding the sale.

If an estate or trust applied for a FEIN but has not received it, what should I enter on Form 593 for the seller’s ITIN?

Enter applied for in the ITIN box on Form 593. Do not enter the decedent’s or trustee’s SSN.

When you receive the FEIN, complete an amended Form 593 as follows:

  • Check the Amended box at the top of the amended Form 593.
  • Write Copy across the top of original Form 593.
  • Write a letter explaining the changes you made and why.
  • Fax the following to 916.845.9512, Attention: Withholding Services and Compliance:
    • Amended Form 593
    • Copy of the original Form 593
    • Letter explaining changes
  • Give the seller a copy of the amended Form 593.

Seller’s Individual Tax Identification Number (ITIN)

What does the real estate escrow person do if the seller fails to provide an ITIN on Form 593-C?

Withhold 3 1/3 percent of the total sale price.

If the seller fails to provide an ITIN on Form 593-C, they do not qualify for an exemption and any certification of an exemption is void.

What should the real estate escrow person do if the buyer wants a copy of Form 593-C or Form 593, but the seller doesn’t want the buyer to have his or her ITIN?

Remove the seller’s ITIN from only the buyer’s copy, but not from the other copies.

Foreclosure

If California real property is sold before the property is foreclosed upon, is withholding required?

Yes, we require withholding. The automatic exemption from withholding due to foreclosures applies when the property is acquired under any of the following circumstances:

  • At a sale due to a power of sale under a mortgage or deed of trust.
  • At a sale due to a decree of foreclosure.
  • By a deed in lieu of foreclosure.

Note: We do not qualify a sale in anticipation of a pending foreclosure action as an exemption. We require withholding.

Sale or transfer

What is a sale or transfer of California real property?

A sale or transfer of California real property includes both:

  • A sale, exchange, or any transfer from one party to another.
  • Any transaction where a party on title before the transaction is not on title after the transaction is complete.

When is withholding required?

We require withholding for the following transaction where a party on title before the transaction is not on title after the transaction is complete:

  • Gift (debt relief): We require withholding if the person going off title is relieved of liability and/or receiving proceeds and the sum of the debt relief and proceeds exceeds $100,000. The amount subject to withholding is the amount of debt relief plus any proceeds the person going off title receives.
  • Refinance (debt relief): We require withholding if an owner goes off title in the refinance. The amount subject to withholding is the amount of debt relief plus any proceeds received if:
    • The person going off title is relieved of liability, and/or
    • The person going off title receives proceeds, and
    • The sum of the debt relief and proceeds is more than $100,000.

We do not require withholding when sellers are on title for incidental purposes.

Exchanges

What are the 1031 like-kind exchange requirements to qualify for a withholding exemption?

To qualify for an exemption of withholding for a like-kind or deferred like-kind exchange, the seller needs to exchange qualifying property for like-kind property.

  • Qualifying property is property held for investment or productive use in a trade or business.
  • Like-kind property is property of the same nature or character, even if it differs in grade or quality. If the seller receives taxable proceeds (boot) exceeding $1,500 from the sale, then withholding is required on the boot.

For more information, see Internal Revenue Code Section 1031 and Internal Revenue Service Publication 544, Sales and Other Dispositions of Assets.

If a 1031 exchange fails, what happens?

If the exchange does not take place or does not qualify for the exemption, then the intermediary or accommodator should:

  • Withhold 3 1/3 percent of the total sale price or the alternative election of the maximum tax rate on the certified amount of gain.
  • Report the sale in the year the exchange fails.

If the seller incorrectly reports the sale in the tax year when the exchange began rather than in the year that it failed, the seller needs to amend his or her California income tax return(s) to report the sale in the appropriate year.

Liens

What should the real estate escrow person do when withholding is required and the taxpayer has a state tax lien?

Contact our Lien Group.

Refunds and credits

Where is my refund or credit?

Call 916.845.4900 or 888.792.4900 for assistance. Have the following documents available when you call:

  • Copy of the cancelled check (front and back).
  • Copy of Form 593–B (for tax years 2007 and prior) or Form 593 (for tax years 2008 and forward).

Forms 592 and 592–B

Is the real estate escrow person responsible for processing Forms 592 and 592-B?

No. Generally, the real estate escrow person processes Form 593. When a pass-through entity is a recipient of Form 593 and the withholding credit needs to "flow-through," use Forms 592 and 592-B to allocate the withholding credit. See FTB Pub. 1017, Resident and Nonresident Withholding Guidelines, for more information.

Escrow closing in a different year

What tax-year forms do we use when escrow opens in one year and closes in a different year?

Use the forms for the tax year in which you close escrow.

Example: Escrow opens December 3, 2007 and closes January 19, 2008. Use the forms for tax year 2008.

Real estate withholding requirement

Why is there state withholding on my real estate transaction?

We administer the tax laws for the State of California, including withholding, as provided in Revenue and Taxation Code Section 18662.

See FTB Pub. 1016, Real Estate Withholding Guidelines, for more information.