For California real estate sales not otherwise exempt, there is a mandatory 3 1/3% withholding requirement from the seller’s gross sales price. Usually this is handled through escrow and in an installment sale; the amount may be paid in installments. California also allows self-reporting to compute withholding using the actual estimated gain, assuming that the highest tax rate applies.
Because California previously required the use of five (5) separate forms for making that determination and reporting, this led to significant confusion. Effective January 1, 2020, California has tried to at least simplify the number of forms by consolidating all into a 5-in-1 form. While somewhat long at 3 pages, if carefully followed, it allows the Seller to approach the reporting in a linear fashion. The new form may be found here.
In working with this form, it is important to know that California real estate withholding laws are designed to have sellers overpay the amount of estimated taxes arising from a real estate sales transaction. Accordingly, even for the best DIY real estate seller, it may make sense to confer with a tax attorney and go over the completion of the Form 593 in order to minimize the applicable withholding required at closing. A tax attorney can also help advise on whether it makes sense for real estate business/investment property on Section 1031 tax deferred exchanges, installment sales, and other strategies to help minimize tax withholding.
Our office has experienced tax attorneys who can help you with these issues.
