401k Investment Limits » 401k Withholding Limits

If you are selling real property in California, you will be subject to California real estate withholding. There were significant changes in the 3-1/3 withholding law effective January 1, 2007 and all buyers and sellers need to be aware of these changes.

Withholding is not required if the total sales price is less than $100,000, the property is being foreclosed upon, the seller is a bank acting as trustee other than a trustee of a deed of trust. There are also certain other exemptions for real estate withholding. If the property qualifies as a principal residence and the sellers owned and lived in the property for two out of the last five years the sellers may be exempt from withholding. Withholding may also not be required if the property was last used by the sellers as their principal residence under IRC Section 121, even if the sellers did not meet the two out of the last five years requirement. If the seller will incur a loss or zero gain on the sale or the seller is transferring the property to the seller's corporation or partnership, the seller will be exempt from withholding. Corporations, LLC's, partnerships and tax exempt entities are not subject to California withholding.

Prior to 2007 the withholding amount was always calculated as 3-1/3% of the total sales price. As of January 1, 2007 sellers can elect to withhold only the gain on sale where the following rates would apply: 9.3% for individuals, 8.84% for corporations, 10.84% for banks and financial corporations, 1.5% for S corporations or 3.5% for financial S corporations. There is an electronic form available through the Franchise Tax Board to calculate your gain on sale.

There is one important note regarding exemption from withholding on the basis of the property being considered a principal residence. Let's say a seller purchases a property as a principal residence in 1999 and lives in the property until 2004. In 2004 the seller purchases another property as a principal residence while continuing to hold the first property as a rental. The seller decides the sell the first property in 2006 and will qualify for exemption from California withholding because the property had been the seller's principal residence for two out of the last five years. One year later in 2007, if the seller should decide to sell the principal residence purchased in 2004, the seller would NOT qualify for exemption from California withholding on the sale of this property, even though the seller has used the property as a principal residence for two out of the last five years. The seller must wait two years from the sale of any principal residence to qualify for exemption from California withholding on the next sale.

Withholding may also be reduced or deferred if the sale qualifies as an IRC Section 1031 exchange or the sale is an installment sale. You should always consult with your attorney and tax professional regarding how the California withholding law applies to your specific situation.

Linda Hunter is a top-producing real estate professional and mortgage loan consultant in Long Beach, California. For more information on California real estate and mortgage loans, visit her web site at http://lindahunter.com/

Source: www.isnare.com