California Star Properties * Newsletter, December 2002

California Star Properties, Inc.
Newsletter Volume 5, Issue 2 • December 2002 - January 2003

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SELLING AN INVESTMENT PROPERTY? READ THIS.

Cal FIRPTA 3-1/3% WITHHOLDING RULES CHANGE

After Jan. 1, 2003, the California Investment in Real Property Tax Act (Cal FIRPTA), requires withholding of 3-1/3% of the sales price for residents as well as non-residents selling investment properties. While this new law does not impose new taxes or increase existing taxes, it does accelerate the receipt of tax revenue (projected to be $225 million) to the state by way of withholding on the seller's taxable gain on investment properties.

C.A.R. will be releasing a revised standard from (AS) to reflect this new law next month. It should be noted that it is the escrow's obligation, no the REALTORS®, but many licensees routinely provide the C.A.R. form to their clients. In the interim, the current form AS with a revision date of June 2000 should be used for transactions closing before Dec. 31, 2002. Note: AB 2065 does NOT impose REALTOR® notice or disclosure obligations.

This does not apply to the sale of principal residences or to 1031 tax-deferred exchanges; there are other transfers not subject to the withholding requirements as well. Individual sellers can no longer apply for and receive a waiver from the Franchise Tax Board even if they can document that the tax owed is less than the 3-1/3 percent of the sales price withheld. Entities such as corporations, LLCs and trusts still can apply for and receive a waiver.

This law (AB 2065) was enacted without having been available for examination in print; it was amended on the evening of Aug. 31, passed by the Legislature Sept.1, and signed by the Governor Sept. 5 along with the many budget items. This was "eleventh hour" legislation amended, passed and signed by the Governor as part of the package of bills that ended the budget impasse. The legislature waived the rule requiring that a bill be in print before it can be acted on.

The C.A.R. board of directors has asked that C.A.R. work with the Franchise Tax Board to postpone the adoption of regulations for the new real estate withholding provision contained in AB 2065 (Oropeza), until corrective legislation has passed and that C.A.R. develop a coalition of interested participants to jointly sponsor corrective legislation.

	Escrows Closing on or before December 31, 2002	Escrows Closing on or after January 1, 2003
Sellers Subject to Withholding	Individuals with a last known street address outside of California (nonresidents) and Non-individuals (corporations, estates, trusts, etc.) with a last known street address outside of California.	Real estate withholding is expanded to include all individuals (residents and nonresidents). It continues to apply to non-individuals with a last known street address outside California.
Rate	The withholding rate is 3 1/3 percent of the total sales price.	No change.
Threshold	Withholding is only required if the total sales price exceeds $100,000.	No change.
Certifiable Exceptions – Individuals	No withholding is required if an individual seller: Is a resident of California or Is selling a principal residence.	Individuals will no longer have an exemption for being a resident. However, in addition to certifying an exemption for principal residence, individuals can certify that they are: Selling the property at a loss for California income tax purposes, Selling the property as a part of an Internal Revenue Code Section 1031 exchange, Selling the property because of an involuntary conversion and will replace the property within the provisions of Internal Revenue Code Section 1033, or Certain foreclosures.
Certifiable Exceptions – Non-Individuals	No withholding is required if a non-individual seller is: A corporation with a permanent place of business in California, A partnership or LLC, A tax exempt entity, insurance company, IRA, or qualified pension plan, An irrevocable trust with CA trustee, An estate with CA descendent, or A bank or bank acting as fiduciary for a trust.	No change.
Waivers & Reduced Withholding – Individuals	Individuals can request a waiver or reduced amount of withholding when there is little or no gain on the sale or the estimated California income tax is significantly less than the statutory withholding amount.	There is no waiver process for individuals. The full amount of withholding is required unless the sellers can certify that they meet one of the exceptions or the buyer agrees to withhold on each payment of an installment sale.
Waivers & Reduced Withholding – Non-Individuals	Individuals can request a waiver or reduced amount of withholding when there is little or no gain on the sale or the estimated California income tax is significantly less than the statutory withholding amount.	No change.
Multiple Sellers	If there are multiple sellers only some of which are nonresident individuals or non-individuals, you must withhold on the total sales price even though the nonresident(s) only own a portion of the property. However, the nonresident individual or non-individual may request a reduced withholding amount.	For individual sellers, withhold according to the seller's interest in the property. For non-individual sellers, no change.
Loss on Sale – Individuals	Individuals can request a waiver if the sale will result in a loss.	Individual sellers will not be withheld upon if they can certify that they sale will result in a loss. The waiver process will no longer be used for individuals.
Loss on Sale – Non-Individuals	Non-individuals can request a waiver if the sale will result in a loss.	No change.
Small Gain – Individuals	Individuals can request a waiver or reduced amount of withholding if the gain on the sale will result in significantly less California income tax than the statutory withholding amount.	Full withholding is required unless the individual has a loss on the sale for California income tax purposes. The Franchise Tax Board cannot allow reduced withholding for individual sellers.
Small Gain – Non-Individuals	Non-individuals can request a waiver or reduced amount of withholding if the gain on the sale will result in significantly less California income tax than the statutory withholding amount.	No change.
Exchanges	If the sale is part of an Internal Revenue Code Section 1031 exchange, the seller may request a waiver of withholding from the Franchise Tax Board. Any boot received by the seller is subject to withholding.	Individuals can certify that the sale is part of an Internal Revenue Code Section 1031 exchange and If it is a simultaneous exchange, only the proceeds (boot) going to the seller will be withheld upon in escrow, or If it is a deferred exchange, the proceeds will go to an intermediary who will withhold, if necessary. Non-individuals must still request a waiver from FTB to eliminate or reduce withholding in escrow.
Due Dates	Withholding must be sent to the Franchise Tax Board by the 20th day of the month following the month escrow closes.	No change.
Forms	Form 597, Nonresident Withholding Tax Statement for Real Estate Sales Form 597-E, Nonresident Withholding Exchange Affidavit Form 597-I, Nonresident Withholding Installment Sale Agreement Form 597-W, Withholding Exemption Certificate and Nonresident Waiver Request for Real Estate Sales	Form 597, Real Estate Withholding Tax Statement (Used to report withholding on all individuals and non-individuals). Form 593-C, Real Estate Withholding Certificate for Individual Sellers (Used by individual sellers when they can certify that they meet one of the exceptions). Form 593-I, Real Estate Withholding Installment Sale Agreement (Used by buyers when the seller is an individual and the buyer wants to withhold on each payment instead of withholding the full amount at the time of sale). Form 593-L, Real Estate Withholding – Computation of Gain or Loss (Used by individual sellers to compute the gain or loss on the sale). Form 593-W, Real Estate Withholding Exemption Certificate and Waiver Request for Non-individual Sellers (Used by non-individual sellers to certify that they meet one of the exceptions or to request a waiver or reduced amount of withholding when there will be little or no gain). Note: Only the 2002 revision of Form 597 and new Forms 593-C, 593-L, 593-I and 593-W can be used for sales closing on or after January 1, 2003. Forms 597-E, 597-I, and 597-W may not be used.

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