You are probably familiar with how income tax withholding works from your payroll. You make an election with your payroll department and a certain amount of taxes are withheld from each paycheck which goes towards your federal and state tax bills in April. There is something similar in real estate transactions for the state income tax portion but most people aren’t aware of it because most transactions are exempt.
It’s basically the same idea as your payroll withholding. If you are likely to pay state income taxes on the sale of your home, California expects you ask the title company to withhold that estimated amount from the sale at close of escrow and forward to the Franchise Tax Board on your behalf.
There are several big exceptions to the withholding requirement that cover most residential sellers: 1. The property you are selling was your primary residence for at least two out of the last five years. 2. You last used it as your primary residence, even if the use was for less than 2 years. 3. You had no gain or you had a loss on the property. In addition to these, there are more exemptions regarding sales by corporations, involuntary sales, tax-exempt entities, etc.
If you can’t qualify for one of the exceptions, then you are supposed to do the withholding. They do give you several options. If you are an individual (meaning not a corporation), you can estimate your gain on IRS Form 593-E and then withhold 12.3% of that gain. Or you can just withhold 3.33% of the sales price if you don’t know all the specifics or your depreciation, basis, etc.. If you withheld more than your actual taxes owed, you should be entitled to a refund of that amount. For more information, do an Internet search for IRS Form 593.
THIS ARTICLE IS NOT TAX ADVICE. PLEASE CONSULT A TAX PROESSIONAL. If you have questions about real estate, call me at (925) 240-MOVE (6683). Voted “Best of Brentwood” multiple times. To search the MLS for free, go to: www.SharpHomesOnline.com. Sharp Realty. #01245186