When is Real Estate Withholding Required?

Filed under: Real Estate Law

You sell your home for a tidy profit…. and you’re surprised on closing day when the state of California withholds some of your gain. What just happened? Does California really tax home sales?

No, home sales absolutely are not taxed, at least not as a separate tax unto itself. However, real estate withholding does address an income tax issue. Just as state income taxes are withheld from your paychecks each week, some taxes may be withheld from the profit of your real estate transaction. That’s because profits from real estate transactions are considered part of your overall taxable income for the year.

It might seem annoying, but withholding the taxes now can prevent you from enduring a very unpleasant surprise when you file your income tax return the following spring. No one wants to find out they owe the state hundreds or even thousands of dollars!

Real estate withholding is required whenever a transfer of title on real property occurs. Examples of these situations might include:

 

  • Sale of the property
  • Gifts or exchanges of property
  • Leaseholds or options
  • Short sales
  • Easements
  • Vacant land is transferred
  • When personal property is included with real property, if not stated separately

 

Generally speaking, it is the responsibility of the buyer to perform withholding, but often the real estate escrow company involved in the transaction will take care of it.

Naturally, there are numerous exceptions to the real estate withholding requirements, and they are all quite complicated. If you’re selling a real estate property in California, consult with a skilled real estate attorney on your rights and responsibilities. If you’re eligible for a withholding exemption, we can certainly help you determine that. We can direct you to the proper forms that you will need to file, so that your exemption is properly processed and communicated to the buyer of the property.

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