The Basics of California Real Estate Withholding

January means tax season is upon us, and there is one aspect of real estate than can be quite confusing when it comes to filing your taxes. That is the California Real Estate Withholding requirements. Legally, sellers of real estate owe taxes on the sale, but it is a complicated process involving many parties. Here is an overview of the basics, in case you need it.

California Real Estate Withholding is a pre-payment of California state income tax (remember, the proceeds of a sale are considered income). A seller can elect to have 3.33% of the total sale price withheld or 9.3% of the gain on the sale.

Now, there are exceptions and exemptions, such as if the house is the seller's primary residence or if it is a foreclosure or a bank-owned sale. But, always consult with a tax expert before assuming your property is exempt.

So, this is where it gets a little tricky. Even though it is the seller's proceeds that are being withheld, it is the buyer's responsibility to do the withholding. And, even though it is the buyer's responsibility, this task usually falls to the escrow officer to make sure it happens smoothly.

At the close of escrow, the seller should receive Form 593 from the escrow officer, and this is submitted with the year-end California state tax return. Think of it like you might think of your income taxes. Your employer withholds taxes, and if you overpaid at the end of the year you will get a tax refund. So even though a chunk of your proceeds will automatically go to the state, you might get a refund if your total tax liability for the year was overpaid.

This overview has been incredibly brief. If you have more questions, check out the state franchise tax board's website, where it has just updated the information on California Real Estate Withholding. Or, just let me know if you have any questions. I am always happy to help. I can be reached at 510-547-5970 x57 or MSmartt@jps.net.