SB 352: Income taxes: withholding: real property sales.
- Session Year: 2017-2018
- House: Senate
- Latest Version Date: 2017-04-18
Existing law requires the transferee of a California real property interest, in specified circumstances, to withhold for income tax purposes 31/3% of the sales price of the property when the property is acquired from either an individual, or a partnership or corporation without a permanent place of business, as specified. Existing law also allows, by election of the transferor, alternative withholding amounts that are not less than the amount of gain required to be recognized under income tax laws multiplied by the corporation tax rate, bank and financial corporate tax rate, the highest personal income tax rate, or the current S corporation tax rate plus the highest personal income tax rate, as applicable. Existing law imposes a penalty for a failure to withhold, as specified, and requires a real estate escrow person to provide written notification to the transferee, other than a transferee that is an intermediary or accommodator in a deferred exchange, of withholding requirements.
This bill would eliminate these withholding provisions for the disposition of a California real property interest that occurs on or after January 1, 2018, and would instead require the transferee transferee, including any intermediary or accomodator in a deferred exchange, of a California real property interest to withhold 313% of the purchase price of the property if the property was either acquired from a person with a last known street address outside this state at the time of title transfer, or from a corporation if after the transfer that corporation has no permanent place of business in this state. The bill would also allow, by election of the transferor, alternative withholding amounts that are not less than the amount of gain required to be recognized under income tax laws multiplied by the corporation tax rate, bank and financial corporate tax rate, the highest personal income tax rate, or the current S corporation tax rate plus the highest personal income tax rate, as applicable. The bill would also require a real estate escrow person to provide the corresponding written notification to subject transferees.
Existing law requires the transferee of a California real property interest, in specified circumstances, to withhold for income tax purposes 31/3% of the sales price of the property when the property is acquired from either an individual, or a partnership or corporation without a permanent place of business, as specified. Existing law also allows, by election of the transferor, alternative withholding amounts that are not less than the amount of gain required to be recognized under income tax laws multiplied by the corporation tax rate, bank and financial corporate tax rate, the highest personal income tax rate, or the current S corporation tax rate plus the highest personal income tax rate, as applicable.
This bill would eliminate these withholding provisions for the disposition of a California real property interest that occurs on or after January 1, 2018, and would instead require the transferee of a California real property interest to withhold 313% of the purchase price of the property if the property was either acquired from a person with a last known street address outside this state at the time of title transfer, or from a corporation if after the transfer that corporation has no permanent place of business in this state.
(a)The Franchise Tax Board may, by regulation, require any person, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and any officer or department of the state, or any political subdivision or agency of the state, or any city organized under a freeholders charter, or any political body not a subdivision or agency of the state, having the control, receipt, custody, disposal, or payment of items of income specified in subdivision (b), to withhold an amount, determined by the Franchise Tax Board to reasonably represent the amount of tax due when the items of income are included with other income of the taxpayer, and to transmit the amount withheld to the Franchise Tax Board at the time as it may designate.
(b)The items of income referred to in subdivision (a) are interest, dividends, rents, prizes and winnings, premiums, annuities, emoluments, compensation for services, including bonuses, partnership income or gains, and other fixed or determinable annual or periodical gains, profits, and income.
(c)The Franchise Tax Board may authorize the tax under subdivision (a) to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent.
(d)Any person that fails to withhold from any payments any amounts required to be withheld by this section or fails to remit the taxes withheld is liable for the amount specified in Section 18668.
(e)(1)This paragraph and paragraph (2) apply to any disposition of a California real property interest that occurs before January 1, 2018, by:
(A)Any person, other than either of the following:
(i)Except as otherwise provided in this paragraph and paragraph (2), a corporation, including an entity classified for tax purposes as a corporation under Part 11 (commencing with Section 23001).
(ii)Except as otherwise provided in this paragraph and paragraph (2), a partnership, as determined in accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, including an entity classified as a partnership for tax purposes under Part 10 (commencing with Section 17001).
(B)A corporation or partnership, if that corporation or partnership immediately after the transfer of the title to the California real property has no permanent place of business in California. For purposes of this subdivision, a corporation or partnership has no permanent place of business in California if all of the following apply:
(i)It is not organized and existing under the laws of California.
(ii)It does not qualify with the office of the Secretary of State to transact business in California.
(iii)It does not maintain and staff a permanent office in California.
(2)(A)Except as provided in subparagraph (B), in the case of any disposition of a California real property interest by a transferor described in paragraph (1), the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to 31/3 percent of the sales price of the California real property conveyed.
(B)If the transferor makes an election under this subparagraph, the transferee, including any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to an amount certified by the transferor in writing under penalty of perjury. The amount certified shall not be less than the gain required to be recognized under Part 10 (commencing with Section 17001) and Part 11 (commencing with Section 23001) on the disposition of the California real property multiplied by the rate specified in either Section 23151 or 23186, as applicable, for transferors that are corporations, or the highest rate specified in Section 17041 for transferors other than corporations. For purposes of applying the previous sentence, the following shall apply:
(i)The highest rate specified in Section 17041 is determined without regard to any other tax rate specified under Part 10 (commencing with Section 17001) irrespective of whether the applicable statute provides that tax shall be treated as if imposed under Section 17041.
(ii)For corporations that are S corporations subject to the modified tax rate specified in Section 23802, the rate shall be the sum of the rate specified in subdivision (b) of Section 23802 and the highest rate specified in Section 17041, as described in clause (i).
(C)(i)The written certification required by subparagraph (B) shall be in a form, as prescribed by the Franchise Tax Board. The form shall provide as follows:
Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.
(ii)The Franchise Tax Board shall make this form available electronically
on its Internet Web site in a format that allows a transferor to complete and print the form. The Franchise Tax Board shall also provide electronic means to enable the transferor to estimate the amount of gain required to be recognized by the transferor in the transaction. Any form or worksheet, electronic or otherwise, developed for this purpose shall provide as follows:
Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.
(3)(A)(i)On or after January 1, 2018, in the case of any disposition of a California real property interest by a person (but not a partnership as determined in accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, or a corporation), when the return required to be filed with the Secretary of the Treasury under Section 6045(e) of the Internal Revenue Code indicates, or the authorization for the disbursement of the transactions funds instructs, that the funds be disbursed either to a transferor with a last known street address outside the boundaries of this state at the time of the transfer of the title to the California real property or to the financial intermediary of the transferor, the transferee transferee, including any intermediary or accomodator in a deferred exchange, shall be required to withhold an amount equal to 313 percent of the sales price of the California real property conveyed.
(ii)If the transferor makes an election under this clause, the transferee, including any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to an amount certified by the transferor in writing under penalty of perjury, then the amount certified shall not be less than the gain required to be recognized under Part 10 (commencing with Section 17001) and Part 11 (commencing with Section 23001) on the disposition of the California real property multiplied by the rate specified in either Section 23151 or 23186, as applicable, for transferors that are corporations, or the highest rate specified in Section 17041 for transferors other than corporations. For purposes of applying the previous sentence, the following shall apply:
(I)The highest rate specified in Section 17041 is determined without regard to any other tax rate specified under Part 10 (commencing with Section 17001) irrespective of whether the applicable statute provides that tax shall be treated as if imposed under Section 17041.
(II)For corporations that are S corporations subject to the modified tax rate specified in Section 23802, the rate shall be the sum of the rate specified in subdivision (b) of Section 23802 and the highest rate specified in Section 17041, as described in subclause (I).
(iii)(I)The written certification required by clause (ii) shall be in a form, as prescribed by the Franchise Tax Board. The form shall provide as follows:
Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.
(II)The Franchise Tax Board shall make this form available electronically on its Internet Web site in a format that allows a transferor to complete and print the form. The Franchise Tax Board shall also provide electronic means to enable the transferor to estimate the amount of gain required to be recognized by the transferor in the transaction. Any form or worksheet, electronic or otherwise, developed for this purpose shall provide as follows:
Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.
(B)In the case of any disposition of a California real property interest by a corporation, the transferee transferee, including any intermediary or accomodator in a deferred exchange, shall be required to withhold an amount equal to 313 percent of the sales price of the California real property conveyed, if the corporation immediately after the transfer of the title to the California real property has no permanent place of business in California. For purposes of this subdivision, a corporation has no permanent place of business in California if all of the following apply:
(i)It is not organized and existing under the laws of California.
(ii)It is not qualified It does not qualify with the office of the Secretary of State to transact business in California.
(iii)It does not maintain and staff a permanent office in California.
(4)Notwithstanding any other provision of this subdivision, all of the following shall apply:
(A)No transferee is required to withhold any amount under this subdivision unless the sales price of the California real property conveyed exceeds one hundred thousand dollars ($100,000).
(B)No transferee, other than an intermediary or an accommodator in a deferred exchange, is required to withhold any amount under this subdivision unless written notification of the withholding requirements of this subdivision has been provided by the real estate escrow person.
(C)(i)No transferee, trustee under a deed of trust, or mortgagee under a mortgage with a power of sale is required to withhold under this subdivision when the transferee has acquired California real property at a sale pursuant to a power of sale under a mortgage or deed of trust or a sale pursuant to a decree of foreclosure or has acquired the property by a deed in lieu of foreclosure.
(ii)No transferee is required to withhold under this subdivision when the transferor is a bank acting as trustee other than a trustee of a deed of trust.
(D)No transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold any amount under this subdivision if the transferee, in good faith and based on all the information of which he or she has knowledge, relies on a written certificate executed by the transferor, certifying, under penalty of perjury, one of the following:
(i)(I)The California real property being conveyed is the sellers or decedents principal residence, within the meaning of Section 121 of the Internal Revenue Code.
(II)The last use of the property being conveyed was use by the transferor as the transferors principal residence within the meaning of Section 121 of the Internal Revenue Code.
(ii)(I)The California real property being conveyed is being exchanged, or will be exchanged, for property of like kind, within the meaning of Section 1031 of the Internal Revenue Code, but only to the extent of the amount of the gain not required to be recognized for California income or franchise tax purposes under Section 1031 of the Internal Revenue Code.
(II)Subclause (I) may not apply if an exchange does not qualify for nonrecognition treatment for California income or franchise tax purposes under Section 1031 of the Internal Revenue Code, in whole or in part, due to the failure of the transaction to comply with the provisions of Section 1031(a)(3) of the Internal Revenue Code, relating to the requirement that property be identified and that the exchange be completed not more than 180 days after the transfer of the exchanged property.
(III)In any case where clause (ii) applies, the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to notify the Franchise Tax Board in writing within 10 days of the expiration of the statutory periods specified in Section 1031(a)(3) of the Internal Revenue Code and thereafter remit the applicable withholding amounts determined under this subdivision in accordance with paragraph (4).
(iii)The California real property has been compulsorily or involuntarily converted, within the meaning of Section 1033 of the Internal Revenue Code, and the transferor intends to acquire property similar or related in service or use so as to be eligible for nonrecognition of gain for California income tax purposes under Section 1033 of the Internal Revenue Code.
(iv)The transaction will result in either a net loss or a net gain not required to be recognized for California income or franchise tax purposes.
(v)The transferor is a corporation with a permanent place of business in California.
(E)(i)In the case of any transaction otherwise subject to this subdivision that qualifies as an installment sale, within the meaning of Section 453(b) of the Internal Revenue Code, for California income tax purposes, the provisions of this subdivision shall be separately applied to each principal payment to be made under the terms of the installment sale agreement between the parties.
(ii)For purposes of clause (i), subparagraph (A) of paragraph (4) does not apply to each individual payment to be received under the terms of the installment sale agreement.
(5)(A)Amounts withheld and payments made in accordance with this subdivision shall be reported and remitted to the Franchise Tax Board in the form and manner and at the time specified by the Franchise Tax Board. Notwithstanding the foregoing, funds withheld on individual transactions by real estate escrow persons may, at the option of the real estate escrow person, be remitted by the 20th day of the month following the close of escrow for the individual transaction, or may be remitted on a monthly basis in combination with other transactions closed during that month.
(B)The transferor shall submit a copy of the written certificate and supporting documentation for the reduced withholding specified in subparagraph (B) of paragraph (2) or subparagraph (D) of paragraph (4), executed by the transferor, to the Franchise Tax Board upon request.
(6)For purposes of this subdivision, California real property interest means an interest in real property located in California and defined in Section 897(c)(1)(A)(i) of the Internal Revenue Code.
(7)For purposes of this subdivision, real estate escrow person means any of the following persons involved in the real estate transaction:
(A)The person, including any attorney, escrow company, or title company, responsible for closing the transaction.
(B)If no person described in subparagraph (A) is responsible for closing the transaction, then any other person who receives and disburses the consideration or value for the interest or property conveyed.
(8)(A)Unless the real estate escrow person provides assistance, it shall be unlawful for any real estate escrow person to charge any customer for complying with the requirements of this subdivision.
(B)For purposes of this paragraph, assistance includes, but is not limited to, helping the parties clarify with the Franchise Tax Board the issue of whether withholding is required under this subdivision or, upon request of the parties, withholding an amount under this subdivision and remitting that amount to the Franchise Tax Board.
(C)For purposes of this paragraph, assistance does not include providing the written notification of the withholding requirements of this subdivision.
(D)In a case where the real estate escrow person provides assistance in complying with the withholding requirements of this subdivision, it shall be unlawful for the real estate escrow person to charge any customer a fee that exceeds forty-five dollars ($45).
(9)For purposes of this subdivision, sales price means the sum of all of the following:
(A)The cash paid, or to be paid, but excluding for this purpose any stated or unstated interest or original issue discount, as determined under Sections 1271 to 1275, inclusive, of the Internal Revenue Code.
(B)The fair market value of other property transferred, or to be transferred.
(C)The outstanding amount of any liability assumed by the transferee or to which the California real property interest is subject immediately before and after the transfer.
(10)The Franchise Tax Board may prescribe, by forms, instructions, published notices, or regulations, any requirements necessary for the efficient administration of this subdivision relating to the treatment of de minimis amounts otherwise required under this section.
(f)Withholding is not required under this section with respect to wages, salaries, fees, or other compensation paid by a corporation for services performed in California for that corporation to a nonresident corporate director for director services, including attendance at a board of directors meeting.
(g)In the case of any payment described in subdivision (f), the person making the payment shall do each of the following:
(1)File a return with the Franchise Tax Board at the time and in the form and manner specified by the Franchise Tax Board.
(2)Provide the payee with a statement at the time and in the form and manner specified by the Franchise Tax Board.
(h)(1)The amendments to this section made by Chapter 488 of the Statutes of 2002 apply to dispositions of California real property interests that occur on or after January 1, 2003.
(2)In the case of any payments received on or after January 1, 2003, pursuant to an installment sale agreement relating to a disposition occurring before January 1, 2003, the amendments to this section made by Chapter 488 of the Statutes of 2002 do not apply to those payments.
(i)(1)The amendments made to this section by the act adding this subdivision Chapter 305 of the Statutes of 2008 shall apply to dispositions of California real property interests that occur on or after January 1, 2009.
(2)In the case of any payments received on or after January 1, 2009, pursuant to an installment sale agreement relating to a disposition occurring before January 1, 2009, the amendments made to this section by the act adding this subdivision Chapter 305 of the Statutes of 2008 do not apply to those payments.
SEC. 2.Section 18668 of the Revenue and Taxation Code is amended to read:18668.(a)Every person required under this article to deduct and withhold any tax is hereby made liable for that tax, to the extent provided by this section. Any amount required to be deducted and paid to the Franchise Tax Board under this article shall be considered the tax of that person. Unless it is shown that the failure is due to reasonable cause, any person who fails to withhold from any payments any amount required to be withheld under this article or who fails to transmit the withheld amounts to the Franchise Tax Board on or before the due date required by regulations is liable for the amount actually withheld, or the amount of taxes due from the taxpayer to whom the payments are made, whichever is greater, but not in excess of the amount required to be withheld.
(b)If any amount required to be withheld under this article is not paid to the Franchise Tax Board on or before the due date required by regulations, interest shall be assessed at the adjusted annual rate established pursuant to Section 19521, computed from the due date to the date paid.
(c)Whenever any person has withheld any amount pursuant to this article, the amount so withheld shall be held to be a special fund in trust for the State of California.
(d)In lieu of the amount provided for in subdivision (a), unless it is shown that the failure to withhold is due to reasonable cause, whenever any transferee is required to withhold any amount pursuant to subdivision (e) of Section 18662, the transferee is liable for the greater of the following amounts for failure to withhold only after the transferee, as specified, is notified in writing of the requirements under subdivision (e) of Section 18662:
(1)Five hundred dollars ($500).
(2)Ten percent of the amount required to be withheld under subdivision (e) of Section 18662.
(e)(1)Unless it is shown that the failure to notify is due to reasonable cause, the real estate escrow person is liable for the amount specified in subdivision (d), when written notification of the withholding requirements of subdivision (e) of Section 18662 is not provided to the transferee, other than a transferee that is an intermediary or accommodator in a deferred exchange, and the California real property disposition is subject to withholding under subdivision (e) of Section 18662.
(2)The (A)For dispositions of a California real property interest that occurs before January 1, 2018, the real estate escrow person shall provide written notification to the transferee (other than a transferee that is an intermediary or accommodator in a deferred exchange) in substantially the same form as follows:
In accordance with Section 18662 of the Revenue and Taxation Code, a buyer may be required to withhold an amount equal to 31/3 percent of the sales price or the amount that is specified in a written certificate executed by the transferor in the case of a disposition of California real property interest by either:
1.A seller who is an individual, trust, or estate or when the disbursement instructions authorize the proceeds to be sent to a financial intermediary of the seller, OR
2.A corporate or partnership seller that has no permanent place of business in California immediately after the transfer of title to the California real property.
The buyer may become subject to penalty for failure to withhold an amount equal to the greater of 10 percent of the amount required to be withheld or five hundred dollars ($500).
However, notwithstanding any other provision included in the California statutes referenced above, no buyer will be required to withhold any amount or be subject to penalty for failure to withhold if:
1.The sales price of the California real property conveyed does not exceed one hundred thousand dollars ($100,000), OR
2.The seller executes a written certificate, under the penalty of perjury, certifying that the seller is a corporation or a partnership with a permanent place of business in California, OR
3.The seller, who is an individual, trust, estate, partnership, or a corporation without a permanent place of business in California executes a written certificate, under the penalty of perjury, of any of the following:
A.The California real property being conveyed is the sellers or decedents principal residence, within the meaning of Section 121 of the Internal Revenue Code.
B.The last use of the property being conveyed was use by the transferor as the transferors principal residence within the meaning of Section 121 of the Internal Revenue Code.
C.The California real property being conveyed is or will be exchanged for property of like kind, within the meaning of Section 1031 of the Internal Revenue Code, but only to the extent of the amount of gain not required to be recognized for California income tax purposes under Section 1031 of the Internal Revenue Code.
D.The California real property has been compulsorily or involuntarily converted, within the meaning of Section 1033 of the Internal Revenue Code, and that the seller intends to acquire property similar or related in service or use so as to be eligible for nonrecognition of gain for California income tax purposes under Section 1033 of the Internal Revenue Code.
E.The California real property transaction will result in a loss or a net gain not required to be recognized for California income tax purposes.
The seller is subject to penalty for knowingly filing a fraudulent
certificate for the purpose of avoiding the withholding requirement.
(B)For dispositions of a California real property interest that occurs on or after January 1, 2018, the real estate escrow person shall provide written notification to the transferee, other than a transferee that is an intermediary or accommodator in a deferred exchange, in substantially the same form as follows:
In accordance with Section 18662 of the Revenue and Taxation Code, a buyer may be required to withhold an amount equal to 31/3 percent of the sales price or the amount that is specified in a written certificate executed by the transferor in the case of a disposition of California real property interest by either:
1. A seller who is an individual, trust, or estate or when the disbursement instructions authorize the proceeds to be sent to a financial intermediary of the seller, OR
2. A corporate seller that has no permanent place of business in California immediately after the transfer of title to the California real property.
The buyer may become subject to penalty for failure to withhold an amount equal to the greater of 10 percent of the amount required to be withheld or five hundred dollars ($500).
However, notwithstanding any other provision included in the California statutes referenced above, no buyer will be required to withhold any amount or be subject to penalty for failure to withhold if:
1. The sales price of the California real property conveyed does not exceed one hundred thousand dollars ($100,000), OR
2. The seller executes a written certificate, under the penalty of perjury, certifying that the seller is a corporation with a permanent place of business in California, OR
3. The seller, who is an individual, trust, estate, or a corporation without a permanent place of business in California executes a written certificate, under the penalty of perjury, of any of the following:
A. The California real property being conveyed is the sellers or decedents principal residence, within the meaning of Section 121 of the Internal Revenue Code.
B. The last use of the property being conveyed was use by the transferor as the transferors principal residence within the meaning of Section 121 of the Internal Revenue Code.
C. The California real property being conveyed is or will be exchanged for property of like kind, within the meaning of Section 1031 of the Internal Revenue Code, but only to the extent of the amount of gain not required to be recognized for California income tax purposes under Section 1031 of the Internal Revenue Code.
D. The California real property has been compulsorily or involuntarily converted, within the meaning of Section 1033 of the Internal Revenue Code, and that the seller intends to acquire property similar or related in service or use so as to be eligible for nonrecognition of gain for California income tax purposes under Section 1033 of the Internal Revenue Code.
E. The California real property transaction will result in a loss or a net gain not required to be recognized for California income tax purposes.
The seller is subject to penalty for knowingly filing a fraudulent certificate for the purpose of avoiding the withholding requirement.
(3)The real estate escrow person is not liable under this subdivision if the tax due as a result of the disposition of California real property is paid by the original or extended due date of the transferors return for the taxable year in which the disposition occurred.
(4)The real estate escrow person or transferee is not liable under paragraph (1) or subdivision (d), if the failure to withhold is the result of his or her reliance, based on good faith and on all the information of which he or she has knowledge, upon a written certificate executed by the transferor under penalty of perjury pursuant to subparagraph (D) of paragraph (3) of subdivision (e) of Section 18662.
(5)Any transferor who for the purpose of avoiding the withholding requirements of subdivision (e) of Section 18662 knowingly executes a false certificate pursuant to that section is liable for twice the amount specified in subdivision (d).
(f)The amount of tax required to be deducted, withheld, and remitted under this article shall be assessed, collected, and paid upon notice and demand. Article 3 (commencing with Section 19031), relating to deficiency assessments, shall not apply with respect to the assessment or collection of any amount due under this article.
(a)The Franchise Tax Board may, by regulation, require any person, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and any officer or department of the state, or any political subdivision or agency of the state, or any city organized under a freeholders charter, or any political body not a subdivision or agency of the state, having the control, receipt, custody, disposal, or payment of items of income specified in subdivision (b), to withhold an amount, determined by the Franchise Tax Board to reasonably represent the amount of tax due when the items of income are included with other income of the taxpayer, and to transmit the amount withheld to the Franchise Tax Board at the time as it may designate.
(b)The items of income referred to in subdivision (a) are interest, dividends, rents, prizes and winnings, premiums, annuities, emoluments, compensation for services, including bonuses, partnership income or gains, and other fixed or determinable annual or periodical gains, profits, and income.
(c)The Franchise Tax Board may authorize the tax under subdivision (a) to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent.
(d)Any person that fails to withhold from any payments any amounts required to be withheld by this section or fails to remit the taxes withheld is liable for the amount specified in Section 18668.
(e)(1)This subdivision applies This paragraph and paragraph (2) apply to any disposition of a California real property interest that occurs before January 1, 2018, by:
(A)Any person, other than either of the following:
(i)Except as otherwise provided in this subdivision, paragraph and paragraph (2), a corporation, including an entity classified for tax purposes as a corporation under Part 11 (commencing with Section 23001).
(ii)Except as otherwise provided in this subdivision, paragraph and paragraph (2), a partnership, as determined in accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, including an entity classified as a partnership for tax purposes under Part 10 (commencing with Section 17001).
(B)A corporation or partnership, if that corporation or partnership immediately after the transfer of the title to the California real property has no permanent place of business in California. For purposes of this subdivision, a corporation or partnership has no permanent place of business in California if all of the following apply:
(i)It is not organized and existing under the laws of California.
(ii)It does not qualify with the office of the Secretary of State to transact business in California.
(iii)It does not maintain and staff a permanent office in California.
(2)(A)Except as provided in subparagraph (B), in the case of any disposition of a California real property interest by a transferor described in paragraph (1), the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to 31/3 percent of the sales price of the California real property conveyed.
(B)If the transferor makes an election under this subparagraph, the transferee, including any intermediary or accommodator in a deferred exchange, is required to withhold an amount equal to an amount certified by the transferor in writing under penalty of perjury. The amount certified shall not be less than the gain required to be recognized under Part 10 (commencing with Section 17001) and Part 11 (commencing with Section 23001) on the disposition of the California real property multiplied by the rate specified in either Section 23151 or Section 23186, as applicable, for transferors that are corporations, or the highest rate specified in Section 17041 for transferors other than corporations. For purposes of applying the previous sentence, the following shall apply:
(i)The highest rate specified in Section 17041 is determined without regard to any other tax rate specified under Part 10 (commencing with Section 17001) irrespective of whether the applicable statute provides that tax shall be treated as if imposed under Section 17041.
(ii)For corporations that are S corporations subject to the modified tax rate specified in Section 23802, the rate shall be the sum of the rate specified in subdivision (b) of Section 23802 and the highest rate specified in Section 17041, as described in clause (i).
(C)(i)The written certification required by subparagraph (B) shall be in a form, as prescribed by the Franchise Tax Board. The form shall provide as follows:
Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.
(ii)The Franchise Tax Board shall make this form available electronically on its Internet Web site in a format that allows a transferor to complete and print the form. The Franchise Tax Board shall also provide electronic means to enable the transferor to estimate the amount of gain required to be recognized by the transferor in the
transaction. Any form or worksheet, electronic or otherwise, developed for this purpose shall provide as follows:
Title and escrow persons and exchange accommodators are not authorized to provide legal or accounting advice for purposes of determining withholding amounts. Transferors are strongly encouraged to consult with a competent tax professional for this purpose.
(3)(A)On or after January 1, 2018, in the case of any disposition of a California real property interest by a person (but not a partnership as determined in accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code, or a corporation), when the return required to be filed with the Secretary of the Treasury under Section 6045(e) of the Internal Revenue Code indicates, or the authorization for the disbursement of the transactions funds instructs, that the funds be disbursed either to a transferor with a last known street address outside the boundaries of this state at the time of the transfer of the title to the California real property or to the financial intermediary of the transferor, the transferee shall be required to withhold an amount equal to 313 percent of the sales price of the California real property conveyed.
(B)In the case of any disposition of a California real property interest by a corporation, the transferee shall be required to withhold an amount equal to 313 percent of the sales price of the California real property conveyed, if the corporation immediately after the transfer of the title to the California real property has no permanent place of business in California. For purposes of this subdivision, a corporation has no permanent place of business in California if all of the following apply:
(i)It is not organized and existing under the laws of California.
(ii)It is not qualified with the office of the Secretary of State to transact business in California.
(iii)It does not maintain and staff a permanent office in California.
(3)(4)Notwithstanding any other provision of this subdivision, all of the following shall apply:
(A)No transferee is required to withhold any amount under this subdivision unless the sales price of the California real property conveyed exceeds one hundred thousand dollars ($100,000).
(B)No transferee, other than an intermediary or an accommodator in a deferred exchange, is required to withhold any amount under this subdivision unless written notification of the withholding requirements of this subdivision has been provided by the real estate escrow person.
(C)(i)No transferee, trustee under a deed of trust, or mortgagee under a mortgage with a power of sale is required to withhold under this subdivision when the transferee has acquired California real property at a sale pursuant to a power of sale under a mortgage or deed of trust or a sale pursuant to a decree of foreclosure or has acquired the property by a deed in lieu of foreclosure.
(ii)No transferee is required to withhold under this subdivision when the transferor is a bank acting as trustee other than a trustee of a deed of trust.
(D)No transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to withhold any amount under this subdivision if the transferee, in good faith and based on all the information of which he or she has knowledge, relies on a written certificate executed by the transferor, certifying, under penalty of perjury, one of the following:
(i)(I)The California real property being conveyed is the sellers or decedents principal residence, within the meaning of Section 121 of the Internal Revenue Code.
(II)The last use of the property being conveyed was use by the transferor as the transferors principal residence within the meaning of Section 121 of the Internal Revenue Code.
(ii)(I)The California real property being conveyed is being exchanged, or will be exchanged, for property of like kind, within the meaning of Section 1031 of the Internal Revenue Code, but only to the extent of the amount of the gain not required to be recognized for California income or franchise tax purposes under Section 1031 of the Internal Revenue Code.
(II)Subclause (I) may not apply if an exchange does not qualify for nonrecognition treatment for California income or franchise tax purposes under Section 1031 of the Internal Revenue Code, in whole or in part, due to the failure of the transaction to comply with the provisions of Section 1031(a)(3) of the Internal Revenue Code, relating to the requirement that property be identified and that the exchange be completed not more than 180 days after the transfer of the exchanged property.
(III)In any case where clause (ii) applies, the transferee, including for this purpose any intermediary or accommodator in a deferred exchange, is required to notify the Franchise Tax Board in writing within 10 days of the expiration of the statutory periods specified in Section 1031(a)(3) of the Internal Revenue Code and thereafter remit the applicable withholding amounts determined under this subdivision in accordance with paragraph (4).
(iii)The California real property has been compulsorily or involuntarily converted, within the meaning of Section 1033 of the Internal Revenue Code, and the transferor intends to acquire property similar or related in service or use so as to be eligible for nonrecognition of gain for California income tax purposes under Section 1033 of the Internal Revenue Code.
(iv)The transaction will result in either a net loss or a net gain not required to be recognized for California income or franchise tax purposes.
(v)The transferor is a corporation with a permanent place of business in California.
(E)(i)In the case of any transaction otherwise subject to this subdivision that qualifies as an installment sale, within the meaning of Section 453(b) of the Internal Revenue Code, for California income tax purposes, the provisions of this subdivision shall be separately applied to each principal payment to be made under the terms of the installment sale agreement between the parties.
(ii)For purposes of clause (i), subparagraph (A) of paragraph (3) (4) does not apply to each individual payment to be received under the terms of the installment sale agreement.
(4)(5)(A)Amounts withheld and payments made in accordance with this subdivision shall be reported and remitted to the Franchise Tax Board in the form and manner and at the time specified by the Franchise Tax Board. Notwithstanding the foregoing, funds withheld on individual transactions by real estate escrow persons may, at the option of the real estate escrow person, be remitted by the 20th day of the month following the close of escrow for the individual transaction, or may be remitted on a monthly basis in combination with other transactions closed during that month.
(B)The transferor shall submit a copy of the written certificate and supporting documentation for the reduced withholding specified in subparagraph (B) of paragraph (2) or subparagraph (D) of paragraph (3), (4), executed by the transferor, to the Franchise Tax Board upon request.
(5)(6)For purposes of this subdivision, California real property interest means an interest in real property located in California and defined in Section 897(c)(1)(A)(i) of the Internal Revenue Code.
(6)(7)For purposes of this subdivision, real estate escrow person means any of the following persons involved in the real estate transaction:
(A)The person, including any attorney, escrow company, or title company, responsible for closing the transaction.
(B)If no person described in subparagraph (A) is responsible for closing the transaction, then any other person who receives and disburses the consideration or value for the interest or property conveyed.
(7)(8)(A)Unless the real estate escrow person provides assistance, it shall be unlawful for any real estate escrow person to charge any customer for complying with the requirements of this subdivision.
(B)For purposes of this paragraph, assistance includes, but is not limited to, helping the parties clarify with the Franchise Tax Board the issue of whether withholding is required under this subdivision or, upon request of the parties, withholding an amount under this subdivision and remitting that amount to the Franchise Tax Board.
(C)For purposes of this paragraph, assistance does not include providing the written notification of the withholding requirements of this subdivision.
(D)In a case where the real estate escrow person provides assistance in complying with the withholding requirements of this subdivision, it shall be unlawful for the real estate escrow person to charge any customer a fee that exceeds forty-five dollars ($45).
(8)(9)For purposes of this subdivision, sales price means the sum of all of the following:
(A)The cash paid, or to be paid, but excluding for this purpose any stated or unstated interest or original issue discount, as determined under Sections 1271 through to 1275, inclusive, of the Internal Revenue Code.
(B)The fair market value of other property transferred, or to be transferred.
(C)The outstanding amount of any liability assumed by the transferee or to which the California real property interest is subject immediately before and after the transfer.
(9)(10)The Franchise Tax Board may prescribe, by forms, instructions, published notices, or regulations, any requirements necessary for the efficient administration of this subdivision relating to the treatment of de minimis amounts otherwise required under this section.
(f)Withholding is not required under this section with respect to wages, salaries, fees, or other compensation paid by a corporation for services performed in California for that corporation to a nonresident corporate director for director services, including attendance at a board of directors meeting.
(g)In the case of any payment described in subdivision (f), the person making the payment shall do each of the following:
(1)File a return with the Franchise Tax Board at the time and in the form and manner specified by the Franchise Tax Board.
(2)Provide the payee with a statement at the time and in the form and manner specified by the Franchise Tax Board.
(h)(1)The amendments to this section made by Chapter 488 of the Statutes of 2002 apply to dispositions of California real property interests that occur on or after January 1, 2003.
(2)In the case of any payments received on or after January 1, 2003, pursuant to an installment sale agreement relating to a disposition occurring before January 1, 2003, the amendments to this section made by Chapter 488 of the Statutes of 2002 do not apply to those payments.
(i)(1)The amendments made to this section by the act adding this subdivision shall apply to dispositions of California real property interests that occur on or after January 1, 2009.
(2)In the case of any payments received on or after January 1, 2009, pursuant to an installment sale agreement relating to a disposition occurring before January 1, 2009, the amendments made to this section by the act adding this subdivision do not apply to those payments.
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Date
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Status
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|---|---|
| Feb 1, 2018 | Returned to Secretary of Senate pursuant to Joint Rule 56. |
| May 25, 2017 | May 25 hearing: Held in committee and under submission. |
| May 19, 2017 | Set for hearing May 25. |
| May 1, 2017 | May 1 hearing: Placed on APPR. suspense file. |
| Apr 21, 2017 | Set for hearing May 1. |
| Apr 18, 2017 | Read second time and amended. Re-referred to Com. on APPR. |
| Apr 17, 2017 | From committee: Do pass as amended and re-refer to Com. on APPR. (Ayes 7. Noes 0. Page 623.) (April 5). |
| Mar 8, 2017 | Set for hearing April 5. |
| Feb 23, 2017 | Referred to Com. on GOV. & F. |
| Feb 15, 2017 | From printer. May be acted upon on or after March 17. |
| Feb 14, 2017 | Introduced. Read first time. To Com. on RLS. for assignment. To print. |
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Date
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Description
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Location
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Votes
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|---|---|---|---|---|
| May 1, 2017 | Placed on suspense file | Senate Standing Committee on Appropriations |
Passed |
|
| Apr 5, 2017 | Do pass as amended, but first amend, and re-refer to the Committee on [Appropriations] | Senate Standing Committee on Governance and Finance |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2017 - 2018 Regular Session
SB 352 (Stone) - Income taxes: withholding: real property sales
Version: April 18, 2017 | Policy Vote: GOV. & F. 7 - 0 |
Urgency: No | Mandate: No |
Hearing Date: May 1, 2017 | Consultant: Robert Ingenito |
This bill meets the criteria for referral to the Suspense File.
Bill Summary:
SB 352 would end the withholding requirement on most sales of real estate interests when the seller resides in California.
Fiscal Impact:
The Franchise Tax Board (FTB) indicates that the bill would result in a revenue loss of $340 million in 2017-18, $410 million in 2018-19, and $70 million in 2019-20; however, this revenue effect reflects the shifting of timing of payments, as withholdings not made in one year would show up in the subsequent year’s tax payments. FTB’s administration costs resulting from the bill have yet to be identified.
Background:
Current state law requires the buyer to withhold on transfers of real estate, except in specified instances. In the past, state law only required nonresident taxpayers who sold California real estate to withhold (unless an exemption applied or FTB authorized a waiver or reduction in the withholding amount). However, the withholding requirement was extended to state residents beginning in 2001-02; the associated revenue acceleration was used to address that fiscal year’s budget shortfall.
Withholding is due on the 20th day of the month following the month escrow closes. Currently, buyers must withhold 3 1/3 percent of the total sales price; however, if the seller makes an election, the buyer instead withholds an amount certified under penalty that is not less than the expected gain required under the appropriate rate imposed by California’s Personal Income Tax or Corporation Tax.
Proposed Law:
This bill would provide that withholding is not required for sales of real estate beginning in 2018, instead applying only to dispositions of California real property interests when the report filed with IRS or disbursement authorization indicates that funds from the sale will be disbursed to either (1) a person with a last known street address outside the state at the time of transfer, or (2) corporations not organized and existing under California law, not qualified to transact business in California by the Secretary of State, and who do not maintain staff or a permanent office in the State.
The measure would exempt all partnerships from the withholding requirement, regardless of residence. Consequently, taxpayers would remit any tax due when filing the appropriate return.
Previous Legislation: AB 495 (Stone, 2016) was substantially similar to this bill, and was held under submission on the Suspense File of this Committee.
Staff Comments:
As noted previously, the real estate withholding requirement originally applied solely to individuals and corporations without any other presence in California to improve compliance, as these entities often failed to ultimately pay the tax due after the sale. Additionally, collecting outstanding taxes from out-of-state entities is more difficult and costly for tax enforcement agencies. While the real estate withholding requirement can be burdensome, some sellers of real estate end up not having the funds to pay the tax a year following the sale. The withholding requirement ensures that the tax is paid by compelling payment when the transaction has just occurred and cash is readily available. Thus, this bill could result in potential increase in collections actions due to noncompliance.
This bill would have no effect on overall tax liabilities; it would only change the timing of tax payments. FTB’s revenue estimate assumes that about $1.2 billion would be collected as real estate withholding under current law. FTB estimates that roughly 15 percent of real estate transactions are conducted by nonresidents and thus would be subject to withholding. Consequently, the remaining $1 billion that would have been withheld on sales by California residents, and partnerships under current law in 2018 and would be due in 2019. FTB assumes that 95 percent of the amount, or $950 million, would be paid in the first two years, 25 percent in the year of the sale and the remaining 75 percent before the due date of the tax return (FTB assumes that the remaining five percent would be subject to collection actions). Thus, according to FTB, the change in timing of the payments results in an estimated revenue loss of $700 million in 2018 and $80 million in 2019, which is then apportioned by fiscal year.
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SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Mike McGuire, Chair
2017 - 2018 Regular
Bill No: | SB 352 | Hearing Date: | 4/5/17 |
Author: | Stone | Tax Levy: | No |
Version: | 2/14/17 | Fiscal: | Yes |
Consultant: | Grinnell | ||
Income taxes: withholding: real property sales
Eliminates the current withholding requirement on most sales of real estate interests when the seller resides in California.
Background
State law requires employers who pay employees California-sourced income to withhold expected tax due, and similarly compels withholding for other items of income, like gifts, prizes, dividends, interest, and capital gains, among others. Withholding agents deposit funds with the Employment Development Department for wage and salary amounts withheld from employees, or the Franchise Tax Board (FTB) for other items of income. Taxpayers reconcile withheld amounts with the actual amount of tax due each year when filing a return. The general penalty for failing to withhold is the greater of $500, or 10% of the amount withheld, which may be abated upon showing reasonable cause.
Unlike most other forms of income, federal law does not require withholding on interests in real estate sales for federal tax purposes, instead requiring that one person involved in the transaction files a report with the Internal Revenue Service (IRS). However, California requires the buyer of interests in real estate to withhold tax on all transfers of real estate, except when the seller certifies that the real estate was the seller’s principal place of residence, part of a like-kind exchange, or an involuntary conversion, because these transactions generally don’t generate taxable income. Additionally, withholding doesn’t apply when the seller is a California corporation or partnership qualified to do business in California, an insurance company, individual retirement account or pension/profit sharing plan, or non-profit corporation. In the past, state law only required nonresident taxpayers who sold California real estate to withhold, unless an exemption applied, or FTB authorized a waiver or reduction in the withholding amount. However, the Legislature imposed this requirement on California resident buyers of residential property due as part of the 2001-02 Budget (AB 2065, Oropeza, 2002). Withholding is due on the 20th day of the month following the month escrow closes.
Additional withholding exemptions include, among others:
- Sales of properties with prices under $100,000,
- Sales pursuant to a mortgage deed of trust foreclosure, deed in-lieu of foreclosure, or a trustee sale need not comply with the requirement.
Currently, buyers must withhold 3 1/3% of the total sale price; however, if the seller makes an election, the buyer instead withholds an amount certified under penalty of perjury that is not less than the expected gain required under the appropriate rate imposed by California’s Personal Income Tax or Corporation Tax (AB 2962, Benoit, 2006). FTB must provide electronic means to help the seller calculate this amount.
Because of the burden placed on sellers of real estate, who do not currently have the option to pay any applicable tax when filing their return, the author wants to repeal the withholding requirement for sellers who are California residents.
Proposed Law
Senate Bill 352 would eliminate the current withholding requirement on sales of real estate on or after January 1, 2018, instead applying only to dispositions of California real property interests when the report filed with IRS or disbursement authorization indicates that funds from the sale will be disbursed to:
- A person with a last known street address outside the state at the time of transfer, or
- Corporations not organized and existing under California law, not qualified to transact business in California by the Secretary of State, and who do not maintain staff or a permanent office in the state.
The measure exempts all partnerships from the withholding requirement, regardless of its residence. As a result, taxpayers would remit any tax due when filing the appropriate return.
State Revenue Impact
FTB estimates revenue losses of $340 million in 2017-18, $410 million in 2018-19, and $70 million in 2019-2020. While SB 352 does not affect the tax due, it does result in a shift in the timing of revenue received and potential increase in collections actions due to noncompliance.
Comments
1. Purpose of the bill. According to the author, “SB 352 would allow a property seller the option to pay the Capital Gains Tax on the sale of the property to the FTB once escrow closes or when that person files their State Income Taxes. This bill does not eliminate or change the tax in any way. The bill only gives the seller another option to pay the amount owed. The seller would have to file a form with the FTB electing to pay the tax with the filing of their State Income Taxes.”
2. Burdens. When the Legislature extended the withholding requirement to California residents, it did so for both compliance reasons and to accelerate cash flow due to a budget crisis. While the real estate withholding requirement is burdensome, some sellers of real estate end up not having the funds to pay the tax a year following the sale. The withholding requirement ensures that the tax is paid by compelling payment when the cash is on the barrel. The Committee may wish to consider whether alleviating the burden is worth the potential loss of compliance.
3. Even flow. The real estate withholding requirements were one of many cash flow acceleration measures the Legislature enacted in the last decade amid State Budget crises, often creating new burdens or compliance problems for taxpayers. To the extent that the state’s fiscal condition has improved sufficiently to eliminate the real estate withholding requirement, the Legislature could review other measures enacted during that time, such as accelerated estimated tax payments, and the Large Corporate Understatement Penalty, among others.
4. Related legislation. SB 352 is nearly identical to last year’s SB 495 (Stone), which the Committee approved unanimously but did not advance from the Senate Appropriations Committee’s suspense file. As introduced, SB 495 eliminated the requirement entirely; however, the Committee amended the measure to eliminate the requirement on California residents and entities, but continue to apply it to nonresidents.
5. Technicals. FTB and Committee staff recommends the following technical amendments:
- Include clarifying language that specifies that the withholding requirements, in the case of property disposition by a person or corporation, on or after January 1, 2018, would apply to any intermediary or accommodator in a deferred exchange.
- Strike L. 17 on P.5.
- Make a conforming change to withholding penalties specifies in R&T §18668.
- Ensure that remaining taxpayers subject to withholding can still use the alternative method where the buyer withholds an amount certified under penalty that is not less than the expected gain required under the appropriate rate, instead of 3 1/3% of the sales price.
Support and Opposition
(3/30/17)
Support: None received.
Opposition: None received.
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Discussed in Hearing
48MIN
Senate Standing Committee on Appropriations
3MIN
Senate Standing Committee on Governance and Finance
Bill Author
Bill Co-Author(s):