The Beauty of Temecula and the Intricacies of Real Estate Withholding - Form 593

A Real-World Example in Temecula Wine Country:

Imagine Jane, a proud homeowner of a beautiful vineyard estate in Temecula, which she bought years ago for $500,000. The serene views and rising popularity of Temecula Wine Country have appreciated the value of her property. Today, she decides to sell her estate for $2,000,000, realizing a gain of $1,500,000.

1. The Sale: Jane's vineyard in Temecula fetches an impressive $2,000,000.

2. Determining Withholding: The State of California may require a withholding on this sale, typically a percentage of the sale price (for our example, let’s use 3.33%). So, the potential withholding amount would be:

   $2,000,000 (sale price) x 3.33% (withholding rate) = $66,600

3. Form 593 Breakdown:

   • Part I: Basic details about the vineyard, the date of the transaction, and the parties involved are noted down.

   • Part II: If Jane meets certain conditions, she might be exempt from withholding. For instance, if this was her primary residence and she stayed there for a significant duration, the exemption might apply.

   • Part III: If exemptions don't apply, this section indicates the amount to be withheld – in our example, $66,600.

4. Finalizing the Sale: Either Jane’s buyer, or more commonly the escrow company, will ensure the withheld amount is sent to the California Franchise Tax Board (FTB) using Form 593.

5. What’s Next for Jane?: When tax season rolls around, Jane will account for this withholding on her state income tax return. If she's paid more than she owes, a refund might be waiting!

Exemptions:

The full list of exemptions can be found on Part III and Part IV of 593 form. Here are the most common ones that the Seller should be made aware of:

• If the sales price is $100,000.00 or less, the exemption is automatic, no form needs to be completed
• The Seller has owned and used the property as his principal residence at least 2 out of the 5 year period right before the sale
• The Seller is a California corporation, limited liability company or partnership that is NOT a single member entity (the ownership is one sole individual) and which is registered to do business in California
• The Seller can claim a loss or zero gain on the sale by filling out Part VI (Computation)
• 1031 Tax Deferred Exchange transactions: If the Seller will be replacing the property, which is declared to be an income property for his tax purposes, by purchasing a new one immediately or soon after, then this can be done under an IRS 1031 tax deferred exchange regulations. In this case he can check one of the boxes on Part IV to claim exemption. However, if he does not conclude the exchange or if only part of the funds are used, then the withholding will still need to be done on the amount not used.
• Installment Sale transactions: When the Seller is lending part of his Sale Price as a loan to the Buyer, the transaction becomes an “installment sale”. This means that the Seller is not getting all his money at the close of escrow, but will get it in installment payments after the closing. This “exemption” is different. The part of funds that the Seller does receive at close of escrow– Sales Price minus the Installment Note amount – will require the withholding. The FTB calls this the “first installment”. Every time the Buyer pays down the principal on this loan, he will have to do the withholding on the principal paid and send that amount to the FTB.

Here are the following links to the FTB website:

• For Withholding requirements go to Publication 1016
• To review all the various forms mentioned above, go to this Link

Please note: State regulations and forms change from year to year and it is important to use and review the most up to date information on the FTB website.

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