Understanding Title Insurance Requirements for Insuring Trusts
Title Consumer #15

The Title Consumer is published by the California Land Title Association. Member companies of the California Land Title Association are dedicated to facilitating the transfer of real property throughout California and increasing the public's awareness of the value and purpose of title insurance.  This communication is provided for informational purposes.  It is general in nature and is not intended to and should not be relied upon or construed as legal or tax advice.  Please consult with an attorney or accountant for further questions regarding these matters discussed in the Title Consumer and / or Title Reporter publications.

When did withholding start for California residents?

California has been withholding the prepayment of taxes for real estate transactions involving non-residents for many years. As of January 1, 2003, the withholding laws were amended to also apply to the dispositions of California real estate by both residents and non- residents.

What is withholding?

Real estate withholding is a prepayment of taxes. It is not an additional tax.

Who is responsible for withholding?

The law holds the buyer (called the transferee) responsible for withholding. In most real estate transactions, the escrow holder transmits the tax to the Franchise Tax Board.

What unit at the Franchise Tax Board handles the withholding?

The Withholding Services and Compliance Section handles the withholding. The phone number for assistance and information is (888) 792-4900. Information can also be found on the Franchise Tax Board’s website at:  www.ftb.ca.gov/pay/withholding/real-estate-withholding.html.

You may check the Franchise Tax Board website both to see how the process currently works and for any updates. The Franchise Tax Board website currently has guidelines which include over 100 questions and answers. See FTB Pub. 1016.

How much is withheld?

The amount withheld is generally 3 1/3% of the gross sale price. The percentage of withholding may differ for entities.

Note: Gross sales price is not the same as the amount that the seller receives at close of the transaction. Loans, liens and the costs of the sale (such as real estate commissions or other settlement costs) are not subtracted to determine gross sales price.

When is withholding due?

Withholding is currently due by the 20th day of the calendar month following the date title is transferred.

What forms are used to report withholding to the Franchise Tax Board?

Currently California Forms 593 and 593V are used to report and remit withholding. The seller will receive needed copies of the forms for their tax returns from the party handling the withholding.

What exemptions apply?

There are many exemptions from withholding. The most common exemptions are as follows:

• Sale of the principal residence of the seller. Principal residence is defined in Internal Revenue Code section 121.
• Sale of property for $100,000 or less.
• Sale of property for an amount that equals a taxable loss or zero gain.
• Tax deferred exchanges

Does the seller have to do anything to document the facts supporting a claim for an exemption?

Yes. The seller will be required to complete and sign, under penalty of perjury, Franchise Tax Board form 593C. If the seller is claiming a loss, the seller will also be required to complete Franchise Tax Board form 593E.

What happens if the transaction does not qualify for an exemption and there are multiple sellers?

If withholding is required, the obligation is divided among the multiple sellers, based on their percentage of ownership.

How do I know if the property qualifies as my principal residence?

Revenue and Taxation code section 18662 refers to Internal Revenue Code Section 121 to define property that qualifies as a principal residence. Generally, the seller must have owned and used the property as the seller’s principal residence for two of the previous five years. There are numerous exceptions in the code that may alter the two-year time frame. Refer to your tax advisor if you have questions about the time period.

What is the role of the escrow holder regarding withholding?

The law requires the escrow holder to provide a notice of the withholding requirements. The escrow holder cannot make a legal determination as to whether any exemption applies.

Will the escrow holder withhold the seller’s money on behalf of the buyer?

The escrow agent may withhold and remit to the Franchise Tax Board if the parties agree.

If the withholding amount is higher than the amount that should be owed to the Franchise Tax Board, what should the seller do?

The seller should contact their tax advisor to determine if they can recover any excess amounts prior to filing their tax return. In most circumstances, any refund occurs after the seller files their California State Income Tax Return for the year in which the sale occurred.

Does it matter if the seller lost money on other real estate or non-real estate transactions?

Not for withholding. Each transaction is considered separately for withholding purposes.

What happens if the property is held in trust?

If the trust is a revocable grantor trust, then it is possible that the trust may be disregarded for tax purposes. If the trust is disregarded for tax purposes, the seller of the real property would be the individual who transferred the property into the trust and has the power to revoke the trust. If the trust is irrevocable, it is possible that the trust itself will be treated as the seller. You should discuss the type of trust that you have with your attorney, legal advisor or tax advisor.

Tax issues are often complex and require a detailed review by an attorney or tax professional. The purpose of this Consumer Series is to provide basic and general information. You should consult with your attorney or tax advisor concerning any questions or issues that you may have with your transaction