Multiple Choice Question: Which of the following statements concerning the 3.33% California withholding requirement is true? Pick the best answer:

A. It’s the capital gains tax owed when selling real property.
B. It applies to any out-of-state seller.
C. A buyer of real property must submit 3.33% of the sales price to the Franchise Tax Board (FTB) for an applicable transaction.
D. All of the above. 

Answer: Similar to the FIRPTA requirements as discussed in last week’s Legal Tip, California’s Franchise Tax Board (FTB) requires the withholding of 3.33% of the sales price for certain real estate transactions.

Just like last week with respect to FIRPTA, Answer A is wrong with respect to the California withholding requirement. The 3.33% is a tax withholding. It may not necessarily be the actual capital gains tax owed by a particular seller-taxpayer. During tax season, the seller-taxpayer who had 3.33% withheld at close of escrow, will file his or her California income tax returns showing the actual amount of capital gains tax owed. If the amount withheld is more than the actual tax owed, the seller-taxpayer may get a tax refund from the FTB. If the amount withheld is less than the actual tax owed, the seller-taxpayer may have to pay more money to the FTB.

Also like last week’s FIRPTA question, Answer B is wrong. It’s true that the California withholding requirement is generally aimed at out-of-state seller-taxpayers who might otherwise be tempted not to file a California tax return. However, the law provides various exemptions from the withholding requirement, such as when the property is the seller’s principal residence for 2 of the last 5 years under section 121 of the Internal Revenue Code. To take advantage of an exemption, a seller must generally complete and provide escrow with a Real Estate Withholding Statement (FTB Form 593).

Also like last week’s FIRPTA question, Answer C is the correct answer this week! To help ensure the collection of taxes, the law generally places a burden on a buyer of real property to do the 3.33% California withholding if applicable. Of course, in our day-to-day practice, the buyer delegates that responsibility over to escrow, under paragraph 11H of the RPA.

More Info: For more information, take a look at C.A.R.’s California Withholding Tax Q&A (password-protected for C.A.R. members only).

-Thank you to Rinde Philippe (Santa Monica Office) for suggesting this week’s legal tip!

Copyright© 2023 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of December 4, 2023. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals. Written by Stella Ling, Esq.