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What Is A Real Estate Withholding Certificate

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The State or the concerned authorities have to take needed measures and steps to make sure that the system is balanced and running by the rules. For this purpose, concrete laws are in place. Tax evasion has been a problem ever since its inception. People resort to all tactics to avoid paying taxes on assets that they are liable to pay upon. But here is the thing; the government is smart too! Every state has a number of legal options to make sure that the tax escapees don’t have a way out. The State of California introduced the ‘Real State Withholding Certificate’ in 2003 for the resident sellers, which till then was only required from the nonresident sellers. Do you know what is a real estate withholding certificate? Real estate withholding certificate is the payment of an estimated amount of income tax that a seller has to make on the profit earned from the sale of a property in USA.

So what does this law of real estate withholding certificate mean? The IRS withholds the income tax on every property sold. This law was introduced for the usual reason of increasing the state provisions and balancing the budget. An estimated $285 million was expected to be added to the State revenue through this law. On a more general front, what a real estate withholding certificate does is that it also serves the purpose of making certain that the income taxes liable on the profit from a real estate sale are paid. The seller is also saved from penalties in case of non-payment or underpayment of the owed income tax. With that we conclude what a Real Estate Withholding Certificate is and what does it do.

If you need help getting a tax withholding certificate, please call us at 407-344-1012, or email us at info@freedomtaxfl.com .

Important Terminologies

Before we move on, you must know about a few important terminologies in order to know what a real estate withholding certificate is, as it will keep showing up in the following section:

  • Estate– the total amount of assets and liabilities of an individual.
  • Trust– it is a legal body created by a grantor for the purpose of benefiting the appointed beneficiaries, under the conditions laid down in law.
  • Trustee– someone who is responsible for managing, possessing (temporarily) and investing the assets on someone else’s behalf to benefit them. This may be an individual or an organization.
  • Fiduciary– someone who has been legally given the authorization to manage the property of another individual for administration purposes.
  • Beneficiary– an individual who has legal rights over benefitting from someone else’s legally entitled property

Now that you are familiar with the above terms regarding what a real estate withholding certificate is, let’s move forward and talk about how exactly does the Real State Withholding Certificate work.

Exceptions to Withholding

There are certain criteria of who is liable to pay these taxes, and what kind of sellers will be exempted from it. Essentially, what a real estate withholding certificate is, the buyer holds back the withholding amount from the total payment as per law. Following sellers can qualify to be exempted from withholding:

  • If the seller or the transferor has the property attested as their primary residence according to the section 121 of IRC. In case the property is of someone who passed away, then it should qualify as the primary residence of the descendent.
  • The last use of the property was as the seller’s principal residence, irrespective of the two year time period
  • Without any regard to the two year timeline, the property should qualify as the primary residence of the seller/transferor or the descendant.
  • In case the seller or the transferor has loss or zero gain in the sale, he qualifies for the exemption of withholding tax on the real estate.
  • The exceptions are for exchanges that are deferred or conversions of property that are involuntary in nature. This means that if the seller or the transferor is selling the property due to uncontrollable conversion or sale and has in mind to buy another property similar to the one sold or that provides identical services, related work, or was itself qualified to have loss or no gain in sale then what a real estate withholding certificate does is that its allows for an exception on the withholding of tax would be made.
  • If the property qualifies for the non-recognition treatment under the IRC Section 721, where the property is offered in partnership in exchange for a partnership interest, or Section 351, where the property is transferred to a corporation in control of the transferor
  • If the seller is an entity that is exempted from tax under federal or state law
  • If a permanent place of business is possessed by the seller corporation in the state or it is qualified for exemption from the Secretary of State
  • If the seller is a profit sharing plan, charitable trust, qualified pension plan, retirement account or an insurance company
  • If the seller is an LLC that is categorized as a partnership for the state and federal income tax purposes or a state partnership that is qualified to do business in the state

Partial or Full Exemptions from Withholding

The following conditions qualify the sale for a partial or full exemption from withholding under a real estate withholding certificate:

  • The sale of the property is through installment sale
  • If the sale of the property qualifies for a deferred or simultaneous like-kind exchange

In all the conditions other than those where the seller qualifies for an exemption, Form 593-C will be filled out and signed by the seller. In the case of requesting an exemption, the seller will fill another form termed as “FTB Form 593-E” along with Form 593-C of real estate withholding certificate.

There is a certain protocol of legal documentation that you have to follow in order to establish your exemption in a real estate withholding certificate. For larger corporations, the option of waiver and reduction in withholding is also allowed, though individual sellers cannot benefit from it.

If you need help getting a tax withholding certificate, please call us at 407-344-1012, or email us at info@freedomtaxfl.com .

The general structure of Form 593-C

The Form 593-C of Real Estate Withholding Certificate is divided into three parts. It initially covers the basic credentials of the seller or transferor, such as:

  • Name,
  • Spouse’s name
  • Address
  • Location details (address, ZIP Code, State, etc)
  • SS or ITIN
  • Souse’s SSN or ITIN

In this section the seller has to mention their individual taxpayer identification number (ITIN) and in case of a joint plan, of their partner as well. This holds for couples in marriage or Registered Domestic Partners (RDPs). In case the sellers are more than one and not married, they will have to fill Form 593-C each.

The second part marks the certifications that make an exception to the withholding of payment from the sale. Here the seller selects the exceptions he wants to request. There are nine options to select from which include:

  • The seller mentioning the estate as primary residence for the last two years.
  • The seller or transferor is not liable to pay taxes under state or Federal LAW.
  • The seller is a
    • Charitable trust
    • Insurance company
    • Any other such entity

In part three, the seller marks the relevant box for exemption, in case any. After these sections, the seller is required to sign the form along with mentioning their name and the date of the agreement. The form has detailed instructions for sellers and buyers. In case escrow is involved, further instructions are given.

The general structure of Form 593-E

As mentioned above, in case the seller opts to request exemption on grounds of no gain or loss in sale, he will have to fill another form. The initial section of form 593-E Of Real Estate Withholding Certificate is the same as Form 593-C. The second part requires details in order to compute the gain or loss. The details include:

  • The selling price of the property
  • The selling expenses incurred during the process
  • The total amount realized (this will be done by subtracting the expenses from the selling price)
  • The purchasing price
  • The points paid to seller or the transferor then
  • The depreciation cost
  • Any other decrement
  • Total decrease to the basic cost
  • Any cost incurred for improvements or additions
  • Any other increment to the basic cost
  • The adjusted basic

Real Estate Withholding Certificate and FIRPTA

California’s real estate withholding certificate is quite similar to Foreign Investment in Real Property Tax Act (FIRPTA) withholding. The difference is in the nature of the ‘disposition’ which includes not only sale but also transference, exchange, liquidation, etc. Another difference is the value of withholding. FIRPTA requires a withholding of 15% from foreigners on the total amount of the disposition.

Just as in California’s Real Estate Withholding Certificate, FIRPTA gives the buyer the withholding power. In case the buyer does not know that the seller is a foreign person and does not withhold taxes on the sale, the liability falls on him mostly.

Tax Value

The tax value of Real Estate Withholding is 3 1/3% of the total sale. Another way to find out the withholding tax amount is to calculate the 9.8% of the profit from the sale. The amount of taxation that you will be resulting with will be very high for sure. Generally many sales are exempted from this certification and those that are subjected to it, can be got around. In case you find some discrepancy in the calculated taxes, you can write to the authorities regarding this. They may issue a re-check but the whole process will be time consuming.

Additional Information

The answer to the question what a real estate withholding certificate is, is also evident in the additional information given in its forms. It has a detailed guideline for computing the basis first and then finding out if the selling price at current had any loss or gain. The third section has the same requirements to be filled in as in Form 593-C. The entire form is more in the shape of an instruction manual. It has proper explanation about what each section requires to be answered and how to go about it. This helps you while filling the form so that you know what is required of you. The form also includes the contact information of relevant authorities.

The instructions are in the following order:

A-Important

Here the guidelines consist of tax withholdings in case of installments. The withholding agent is to hold 3 1/3% on first installment and buyers have to refer to Form 593-I Real Estate Withholding, Sale Acknowledgement.

This section also clarifies the reference to RDPs; it addresses both Registered Domestic Partners and Registered Domestic ‘Partnerships’ in this Form under the name of ‘RDPs’.

B-Purpose

This section lists the conditions of not withholding, thus the exceptions. The exceptional conditions in requiring a real estate withholding certificate have been described above, though TWO more conditions are also mentioned which exclude the parties from withholding and completing the form

  1. The United States of America
  2. Any State, possessions of USA and the District of Columbia, along with any of its political subdivisions, etc.

C-Real Estate Withholding

This section explains what a Real Estate Withholding is; a prepayment of the income tax liable on the sale of a real estate in the state of California. It further identifies the role of a Real Estate Escrow Person (REEP), which could be a person, a title company, an attorney, etc that has the responsibility to close the sale of a real estate sale and redistribute the accumulated funds. This section also clarifies the process of withholding calculation. Furthermore, the responsibilities and tasks of a Withholding agent, or a REEP, are also explained in detail.

Specific Instructions

The form 593-C goes on with further very clear elaboration of terms and conditions.

  • It explains what an individual is and what body will be regarded as a corporation.
  • How the information in Part 1 should be entered for either a single seller or a group of them.
  • How would a grantor trust fill the form for a Real Estate Withholding Certificate.
  • Under what conditions will a grantor trust be disregarded from tax payment.
  • How the form is to be filled in case of a single member limited liability company.
  • How the ownership percentage is to be mentioned.
  • In case of having just the name in title ship and zero financial ownership, the ownership percentage is going to be 0.00.
  • The conditions of exception from withholding.
  • The form is to be signed.
  • In case of showing a false real estate withholding certificate to avoid withholding, penalty will be charged.
  • Either $1,000 or 20% of the total withholding is to be paid as a penalty, whichever being greater.

Form 593-E of Real Estate Withholding Certificate also has the same instructions mentioned. Though, at the end of the document, a detailed guideline of calculating the ‘basis’ is given. The method of calculating the basis depends on how the property was initially acquired. These include whether:

  • The property was received as a gift
  • The property was inherited
  • The property, in the context of community inheritance, was owned by your spouse/RDP and you, but the partner has passed away
  • The property, in the context of joint tenancy, was owned by your spouse/RDP and you, but the partner has passed away
  • You acquired the property as a result of divorce or termination of registered domestic relationship.
  • The real estate was acquired in exchange of another property
  • The house built or any other improvements or additions done on the real estate were done by you
  • The property was acquired as the result of a foreclosure

All these calculations will be context dependent. The costs incurred initially, the additionally costs on maintaining the property and the depreciation costs, all are added up and subtracted from the final selling price. Though, as mentioned, there would be variations depending on the situation. Through these calculations you will reach your ‘Basis’, the cost of the estate which will then be compared to the price the estate in question is sold. Hence, you will arrive at the conclusion if there was any loss or zero gain in the entire transaction.

This law has been very comprehensive and elaborate. The transactions, though, are usually withheld, but have proved to be effective in collecting prepayments of income taxes on real estate sales. This article has extensively covered the conditions and what a real estate withholding certificate is, however, technical realities would vary from estate to estate.

If you need help getting a tax withholding certificate, please call us at 407-344-1012, or email us at info@freedomtaxfl.com .

Robert AcevedoWhat Is A Real Estate Withholding Certificate

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