20 Questions - Real Estate Withholding
Results of real estate withholding interested parties meeting
On December 11, 2006, we met with interested parties to discuss the new real estate withholding law (AB 2962). Interested parties included representatives from the California Land Title Association, California Association of Realtors and California Escrow Association, and members of the Franchise Tax Board Advisory Board.
Approximately 225,000 – 250,000 real estate sales transactions totaling $2 billion occur in California each year, which are subject to withholding. Before passage of AB 2962, a flat rate of three and one-third percent was withheld, resulting in over-withholding for many taxpayers. AB2962 dealt with over-withholding by providing an alternate withholding method.
Meeting participants asked questions and offered comments. Their comments and questions are listed below, with accompanying FTB responses. To read the text in full, and to view the meeting agenda, see “Results of Real Estate Withholding (AB 2962) Interested Parties Meeting, December 11, 2006.” From our homepage, click on the “News” tab, and then “Interested Parties Meetings”. Also see “Real estate withholding – compute your estimated gain or loss online” in this issue of Tax News.
AB 2962 questions, answers, and suggestions
- What should sellers do if they don’t have computers?
Sellers can submit hard copies.
- Is the booklet with 593-C and 593-E available online?
The 2007 booklet is available on our Website. Search for “593 booklet.”
- How would sellers know that they should keep the 593-E for five years?
When the form is completed online, it sends a message that the form should be retained for five years.
- How should taxpayers calculate withholding if they make installment payments?
See the instructions on page 6 and 7 of Form 593-B.
- Is it necessary for taxpayers to fill out Form 593-E if they already know what the gain is?
The entry on line 16, “gain on sale,” is a calculable entry. We recommend that sellers complete Form 593-E for their records, in case FTB questions how they computed their withholding.
- Do the forms or publication show a link for the online calculator?
No. We can email the link to all meeting attendees. You can also access the calculator by going to our FTB Website at www.ftb.ca.gov.
Please see related article in this issue: Real estate withholding - compute estimated gain or loss online.
- Should 2006 forms or 2007 forms be used if escrow closes before January 1, 2007 but the forms aren't submitted until after January 1, 2007?
Use 2006 forms when escrow closes in 2006, and 2007 forms when escrow closes in 2007. Using the wrong year form (i.e. using a form for a year that is not the same as the year entered in box 2 of Form 593-B) may cause a delay in processing the credit.
- Can our seller/clients sign both the 2006 and 2007 forms if we are unsure if they will close in December 2006 or January 2007?
Yes, if the seller is comfortable with signing both forms, and if you return the signed, unused form to the seller.
- Where should we report withholding for pass-through entities?
The S corporation uses the credit for its share of taxes and then the remainder is passed through to the shareholders and reported on the K-1. The S corporation needs to file Form 592-B for each shareholder to allocate the credit to the shareholders. The real estate escrow person is responsible only for withholding on the S corporation as an entity, not for withholding on the individual S corporation shareholders.
- Can FTB add an instruction to page 2 of Form 593-C and 593-E instructions, saying that 593-E should be retained by the seller for five years for their records?
We will do this on a going-forward basis. We won't be able to make this change to current hard copy forms, because the forms have already gone to press.
- The forms are inconsistent in their references to withholding agents, escrow officers, and preparers. Can FTB ensure that the forms are consistent? For example, there are several cases where it should say withholding agent instead of escrow officer, including:
- Form 593-C, Part 3, above item 10.
- Page 6, under line 5.
- Page 6, under the second note under line 7.
Participants also made the following forms suggestion:
- Remove the extra decimal point on Form 593-E.
- Line 12 - Installment sale - is not normal practice. Recommend: determine if this is administrative or statutory language. Possibly remove the word "normally."
- The bold language on Form 593-E is great, but bigger and bolder would be even better.
We will examine the forms and, where possible, will make corrections and update the online versions of the forms. The current hard copy forms will not reflect the changes, however.
- The forms require a lot of information, and sellers don't always read the instructions. 593-B is confusing for the seller because it requires a signature under Part 2 of the form if they are electing the alternative withholding rate, but the seller should not sign there if they are choosing the three and one-third percent withholding rate. What should the escrow or withholding agent do if this happens?
They should send in the form anyway. The calculation on the form will show which rate sellers choose.
- What should the withholding agent do if escrow closes, and there is no signature on the form even though the seller chose the 9.3 percent rate on the gain? The instructions on the form say that the three and one-third percent rate will be applied if there is no signature.
Escrow can make the correction as long as everything is done correctly when it is submitted to FTB. We will follow up on this.
- Will withholding agents be penalized if the seller makes mistakes that the withholding agent is unaware of?
The penalties are not in place for unintentional mistakes. As long as withholding agents provide the information to the best of their knowledge, penalties will not be charged.
- What is the determination for issuing penalties?
Penalties are focused on extraordinary situations and flagrant violators.
- Who gets the $50 penalty - the seller or FTB?
All penalty amounts should be sent to the FTB.
- Is there a statutory basis for the penalty? And, how does the state know if the withholding agent gave the appropriate form(s) to the seller?
Yes, there is a statutory penalty for late payments.
The state can determine if the appropriate forms were provided to the seller during an audit, when FTB requests the documents that were given to the seller by the withholding agent.
- The following language from FTB 677, Information for Sellers and Buyers, might be misleading, and the buyer may presume that withholding will be done by the escrow officer:
"...as part of the escrow services, the escrow officer generally assumes the responsibility for withholding or documenting why no withholding was done and for sending payment to the Franchise Tax Board."Can FTB fix this?
We will take note of this, and rethink the language for our next update.
- Although signatures are not supposed to be faxed, what happens if they are faxed?
We will follow up on this question.
- Language in AB 2962 states that escrow officers accept and submit information in good faith. An escrow officer is not supposed to know the seller's gain. Is the Withholding Agent liable for incorrect information given to them by the seller?
This language in AB 2962 was designed to address blatant wrongdoing.
Meeting participants also offered these suggestions:
- FTB should revise the 593-B to require a signature from the seller whether they choose the three and one-third percent, or 9.3 percent rate.
- Revise Part 2 language to stand out more.
- If the seller elects three and one-third percent, include a note that says "do not sign below."
- Have the seller initial next to the three and one-third percent rate if the seller chooses this rate.
- Enlarge Box 6.
We appreciate these comments and suggestions, and will consider them all.