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Mandatory California Franchise Tax Board Withholding Requirements

Section 18662 of the California Revenue and Taxation Code

In accordance with Section 18662 of the California Franchise Tax Board Revenue and Taxation Code, a buyer is required under certain cirsumstances to withhold an amount equal to 3 and 1/3% of the gross sales price, in the case of a disposition of a California real property interest by either:

1.  A seller who is an individual 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.

Buyer's Penalty for Failure to Withhold

The buyer will be subject to a penalty equal to the greater of 10% of the mandatory withholding amount required to be withheld or five hundred dollars ($500.00) for failure to withhold.  However, notwithstanding any other provisions 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 ($100,000.00); 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, executes a written certificate under the penalty of perjury, of any of the following:

A.  That the California real property being conveyed is the seller's principal residence (within the meaning of Section 121 of the Internal Revenue Code).

B.  That 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 or Section 1.1031 of the Department of the Treasury Regulations.

C.  That 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.

D.  That the California real property transaction will result in a loss for California income tax purposes.

The seller is subject to penalty for knowingly filing a fraudulent certificate with the Escrow/Closing/Settlement Agent, Qualified Intermediary/Accommodator and/or the California Franchise Tax Board for the purpose of avoiding the withholding requirement.

Responsibility of Investor

It is the sole responsibility of the Investor to instruct the Escrow/Closing/Settlement Agent as to whether the Escrow/Closing/Settlement Agent is to withhold any required amounts pursuant to the above statutes.  The Qualified Intermediary (Accommodator) is merely facilitating the investor's 1031 tax deferred exchange transaction and does not assume any responsibility for the mandatory California Franchise Tax Board withholding requirements unless the transactions has closed and the Qualified Intermediary is in receipt of investor's 1031 exchange funds.

The California Revenue and Taxation Code permits a maximum charge or fee of $45.00 to the party that provides "assistance" to the Taxpayer with regard to the California Franchise Tax Board 's mandatory withholding, including a Qualified Intermediary.

For additional information regarding the mandatory California Franchise Tax Board withholding requirements discussed herein, please contact:

California Franchise Tax Board (FTB)

Withholding Services and Compliance Section

Post Office Box 651

Sacramento, CA 95812-0651

(916) 845-4900 telephone

(888) 792-4900 toll free

(916) 845-9512 facsimile

or you can visit the California Franchise Tax Board's Web site.

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