AB 2065 - California's Tax Law Changes.  New Withholding Rules Take Effect January 1, 2003.


A brief overview and highlights of the new tax law

Starting January 1, 2003, people buying California real estate must withhold 3 1/3 percent of the sales price (from seller's proceeds) and send it to the Franchise Tax Board, according to the FTB.

"This change in the state withholding requirements will accelerate much needed tax revenue by $225 million for this fiscal year," said State Controller and FTB Chair Kathleen Connell.  "It is a major change with broad impacts.  I do not want anyone to be caught off guard this year when the new tax law takes effect."

For real estate sales closing after December 31, 2002, the new law (AB 2065) requires buyers of California real estate to withhold income taxes and send them to the FTB.  In most cases, the FTB believes the buyers will delegate this duty to the escrow officers who are, by law, required to notify buyers of their withholding requirements.  The penalty for not complying is the greater of $500 or 10 percent of the withholding amount.

There are some exceptions in the law.  Withholding is not required if the total sales price is $100,000 or less, and for principal residences, sales resulting in a taxable loss, like kind exchanges, and some involuntary conversions.  Also exempted are sales where the seller is tax exempt or a California corporation or partnership.

Current real estate withholding laws only apply to sales by nonresident sellers of California real estate.  The new law expands to include all individuals-residents and nonresidents.  Unlike the current law, the FTB will not grant individuals a waiver or reduced rate of withholding for sales with small taxable gains.  The FTB estimates this law impacts 300,000 real estate sales each year.

Tax withholding is a prepayment of state taxes that sellers who profit from their real estate sales will owe.  It is much like wage-withholding employees have deducted from their paychecks.  California, like the federal government, has a "pay as you go" tax system, meaning taxes are due as you earn income, not after the end of the year when you file your tax return.  Real estate withholding will, in many cases, save the seller from having to make an estimate payment to cover the tax from the real estate sale's gain.

For more information, access the FTB's Website at www.ftb.ca.gov or call the FTB at (818) 792-4900

• The above article is for information only.  Consult with a tax professional for any tax advice.


Copyright ©2002 John Calvo. All rights reserved.

John Calvo is a California licensed real estate broker associated with Lighthouse Realty Associates.  CA DRE # 01208146