State of California Real Estate Withholding

Updated February 12, 2014

FOREIGNERS AND THEIR PROPERTY INVESTMENTS
(Part 2 – State of California Real Estate Withholding under the Revenue and Taxation Code)

The State regulations regarding withholdings on real property sales is a little different from the Federal withholding as mentioned in Part 1 – withholding under the FIRPTA guidelines. For the State, the law is written such that all real property being sold requires the payment of tax in an amount equal to 3.33% of the sales price. The amount is withheld from the Seller right in the escrow transaction and sent to the Franchise Tax Board at closing. The amount is considered a “prepayment” of income taxes on the potential gain. There are, however, certain withholding exemptions and those can be found on California’s 593-C Real Estate Withholding Certificate.

EXEMPTIONS that can be claimed:

1) If the sales price is $100,000.00 or less (exemption is automatic).

2) The Seller has used the property as his principal residence at least 2 out of the 5 year period right before the sale.

3) The Seller is a California corporation, limited liability company or partnership that is registered to do business in California.

4) The Seller can claim a loss or zero gain on the sale by filling out form 593-E (Computation of Estimated Gain or Loss).

5) 1031 Tax Deferred Exchange transactions: If the Seller is doing a 1031 tax deferred exchange with the property, then he can check one of the boxes on the 593-C form. However, if he does not conclude the exchange or only part of the funds are used, then the withholding will still need to be done.

6) Installment Sale transactions: A different animal! This “exemption” is different and only goes so far. If the Seller is carrying a loan for the Buyer then the part of funds that he receives at the close of escrow will require the withholding AND every time the Buyer pays the principal on this loan, he will have to do the withholding on the principal paid and send that amount to the State. The Buyer must complete and sign form 593-I (Real Estate Withholding Installment Sale Acknowledgement) at close of escrow. If the parties decide NOT to withhold on an installment sale, then the Seller must declare the full sale on his next tax return and send a written request to the FTB to release the Buyer from withholding on the installment sale payments.

The above exemptions, with the exception of the 1st one, are not automatic. Your Settlement Agent will be providing the Franchise Tax Board form 593-C (Real Estate Withholding Certificate) to be reviewed, completed and signed. If the Seller can check any one of the boxes on the form, then the transaction is exempt.

Can I submit a lower tax amount? The standard withholding is 3.33% of the sales price. However, the State will allow Sellers to calculate and submit 12.3% on the gain amount for an individual or 13.8% for a corporation. In order to withhold on this lesser rate the Seller must complete form 593-E (Computation of Estimated Gain or Loss) first and hand this form, together with the 593 (Withholding Tax Statement) to the Settlement Agent.

Do I need a Tax ID number? One of the important aspects of the 593-C form is that if the Seller is able to check one of the boxes on the form, but is not able to provide a Social Security Number or Tax Identification Number (TIN), then the form itself is void and the full withholding and payment of the 3.33% tax is automatically required. This means that a foreigner who uses the property as his principal residence MUST have a TIN number in order to qualify for the exemption.

This can be obtained by submitting form W-7 (http://www.irs.gov/pub/irs-pdf/fw7.pdf to the IRS (see instructions – http://www.irs.gov/instructions/iw7/ch01.html#d0e465). We will require this TIN number by the time we close escrow and as it takes 6–8 weeks to process.

How do I get my money back? The tax amount must be sent to the state within 20 days from the end of the month in which the transaction closed. The amount sent to the Franchise Tax Board is a “prepayment” of income tax due on the gain. To get the money back the Seller must file their income tax return at the end of the fiscal year and include a copy of the 593-V form (Payment Voucher) used to remit the tax amount. If the funds sent to the Franchise Tax Board are more than the tax liability for that year, the FTB will refund the difference.

Whose responsibility is it to make sure the law is followed? Unlike the Federal (FIRPTA) laws, the responsibility for obtaining the signatures on the correct State withholding forms fall on the Settlement Agent handling the sale. It is the Seller’s responsibility to complete the forms correctly and seek independent financial and legal counsel. As the forms state, “title and escrow persons, exchange accommodators are not authorized to provide legal or accounting advice on the withholding amounts”.

Audits! Yes! The Franchise Tax Board does audit Settlement Companies to make sure that the regulations are followed.

For further questions regarding the State of California’s Real Estate Withholding laws, you can click on the following links:

For Withholding requirements: https://www.ftb.ca.gov/individuals/wsc/California_Real_Estate.shtml

For all the various forms mentioned above, go to:
https://www.ftb.ca.gov/individuals/wsc/forms_and_publications.shtml

We hope this article has been of interest to you. Please leave us a comment or a general question on our website, www.vivaescrow.com. If you are interested in the federal Foreign Investment in Real Property Act (FIRPTA) which is Part 1 of this series, please look for that on our site too.

{ 42 comments… read them below or add one }

Rick Schmidt April 21, 2014 at 9:46 am

My son and I purchased a home and the title shows us as 50% owners. I am on the title since I provided the down payment. The house has been his primary residence. I am not going to receive anything but my down payment back from the sale of the house. For federal purposes it looks like I can claim zero % and not receive a 1099. However I do not see how I can do the same for Californa. Is there a way for all of the profit from the sale to be credited to my son. He will be purchasing another house.

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Juliana Tu April 21, 2014 at 11:46 am

To be sure all the profit of the sale of the home goes to your son, and the 1099 and California withholding is issued to your son, please advise your Escrow Officer and have them draw up the necessary document stating that this will happen. Each company has their own management policies with respect to the changing of the declaration of ownership, so you need to talk to your Escrow Officer and see how they would like to handle it.

I am sorry, but the only person who can help you will be your Escrow Officer. Please explain the situation to him or her.

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Jesse April 16, 2014 at 8:14 am

Hi there
I am selling my home in CA, owning it for a little over 5 years. It is currently a rental, been so for about 14 months. Prior to that I lived in the property since buying ion 2008. Does that make my sale exempt from filing a 593 tax form?
Thank you

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Juliana Tu April 16, 2014 at 10:50 am

The California Withholding law states that the property is considered to be your principal residence and exempt from withholding if you have lived on it for 2 years out of the 5 years immediately preceding the sale. If you have it rented out for the last 14 months, then unfortunately, according to the law, it would not qualify as your principal residence and withholding has to be done.

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Ashlee Jennings April 18, 2014 at 3:53 pm

The law in California is that you will have occupied the property for at least two out of the last five years, so you would check the boxes on the 593 form which apply and state the time period as true and you are NOT subject to withholding. It is NOT two prior years, it is for at least two our of the last five years. Many people purchase as a primary residence live in it for 2 or 3 years and then decide to purchase another property and rent it out or have to move out of the area for work or something.Those people who decide to sell and count back 5 years… they will need to have lived in it for at least 2 of them to be exempt from withholding.

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Carrie April 9, 2014 at 11:22 pm

Hello,

I am selling my primary residence for $475,000 and purchasing another property for $253,00 from proceeds of the sale. After all costs of the sale and the purchase, I will probably end up with $80,000 left over plus the $253,00 to purchase the property. Do I need to fill out a 593-C or E or can I just fill out the Certification for no information reporting? I thought I read because I occupied this property as my primary residence I’m exempt?

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Juliana Tu April 10, 2014 at 11:21 am

Under California’s withholding law, as long as the property sold is your primary residence and you have lived in it 2 out of the 5 years preceding the sale, then you are exempt from withholding. You can check box # 1 of the 593C form and you are done.

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frederick laing April 3, 2014 at 10:34 am

have sold my home in ca 2013 and moved to nv

in filling up my 593e the title company listed a home equity loan on the property should this loan be considered as a cost to
should I reduce the selling price by that amount for ca tax purposes the property

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Juliana Tu April 3, 2014 at 11:11 am

The 593 E form asks for your present sale value and asks for your previous purchase value. The loans on your property are not a part of the calculation to determine your loss or gain. Please consult with a CPA when filling out the form. We and your Escrow Company are not authorized to give you financial advice on how to complete the form.

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Tom McIntosh March 22, 2014 at 11:20 am

I purchased a property in October of last year on an installment sale basis. I have been making the required withholding of 3.33% of the principal amount of each monthly payment and sending same to the FTB with form 593-V. The seller assured me he would get me an exception with the filing of his 2014 taxes but now states he has not done so and that I must continue to make the withholding payments to the State. Can I charge the seller a reasonable fee for the time my bookkeeper must take to make this monthly calculation and payment to the State?

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Juliana Tu March 22, 2014 at 5:14 pm

Your question is whether you can charge the Seller a reasonable fee for doing the monthly 3.33% withholding to the FTB on an installment sale. That is actually a very good question and I don’t know the answer. There is nothing in the 593I form that you signed that says that you cannot, but I think if a fee is charged, it would have to be agreed upon by both you and the Seller. It would be a private matter and perhaps you can start if off by writing a letter and letting him know that you will be doing that and seeing what his response is. If he agrees, you can draw up a simple agreement and have both parties sign for acknowledgment. You are rendering him a service after all. Please note that this is a suggestion/comment only on our part and there is no legal or financial interpretations given by us as we are not allowed to do so.

There are companies who are set up to do this type of collection and subsequent payment to State for installment sales and you can give them a call if you would like. They can give you more information. Having a third party do this for a fee would take the responsibility out of your hands and the Seller’s hands. Evergreen Note Servicing has an agent in California called David Shean and his number is (818) 517-3750. The main office is (888) 358-6683.

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gerry February 19, 2014 at 8:55 pm

question i have a property i bought for 400k selling for 290k wich ill giving a 43500 gift of equity wich borrower will only pay 250k would i pay taxes on gift equity even i had a loss ,new borrower is only assuming remaining loan of 250k remaining balance.

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Juliana Tu February 20, 2014 at 11:11 am

If the property you are selling is in California, there is a requirement that a “prepayment” of income tax on the profit you made on the sale. There are certain exemptions, however. If you are selling at a loss, you will need to fill out a 593-C form with your settlement agent, check the box that states you are taking a loss, and then fill out a 593-E form which shows how you derived at the loss amount.

As to tax on the equity gift, you will need to contact a CPA to answer this question. As a settlement service company we are not allowed to give legal or financial counsel.

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Carl February 9, 2014 at 2:11 pm

We, my wife and I own a rental property for 40 years. Everything is paid for it. Since we have everything written off.
The full amount of the sale would be taxable? We have been contacted by a real estate salesman and offered us a fear
price. There where no contractor inspection or termite/structural report and no repairs requested.
They also will close the deal on a short time for all cash and pay all the sellers closing fee.
Are there any other exemption we have look for and state laws ?
Would this be a clear sale ?
Carl

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Juliana Tu February 10, 2014 at 8:39 pm

Let me first qualify my answer to your question by stating that we are a settlement services/escrow company in California, and most of our transactions are for handling properties in this state. Other states have different laws, rules, regulations and standards of practices that I cannot comment on. If you are from a state other than California, you should ask your question of closing professionals or closing attorneys in your state.

Also, your question regarding if the full amount of sale would be taxable is a financial question and you must contact your CPA for an answer for that.

What I can answer is that since this is a rental property for you, you will need to meet the California Withholding requirement of payment of 3.33% of the sales price at the close of your escrow transaction. There are no exemptions that you can look for under state laws.

As to whether this is a “clear” sale, I don’t know how to answer that as I am not sure what you mean by “clear” sale. From what you have written it reads like this is a sale that has no contingencies. I think that may be what you are asking.

Again, please consult with your CPA before you finalize the transaction. We cannot give financial counsel and we don’t know your financial background.

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Madhu January 30, 2014 at 2:35 pm

Me and my ex wife jointly held a rental property until we divorced , during the divorce we sold the renal property with capital gain taxes, the escrow witheld the require percentage but since we split the porperty proceeds 70% in my name and 30% in my ex name, we paid the appropirate share of withholding taxes , I paid 70% of the tax liable and she paid 30%.
However the form was a single form that was jointly signed and it showed the total amount withheld.

Now since we will file our taxes seprately, should I just claim my share of advance tax paid referring to the form that shows the witholding percentage and she claim her advance tax paid.

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Juliana Tu January 31, 2014 at 4:01 pm

Hello and thank you for visiting our Viva Escrow website and leaving a question.

When 2 parties have different interests in a property and will be filing taxes separately, the escrow officer should have given separate forms to both parties, so that the correct amounts are reflected to each along with their tax identification number.

I really don’t know how to answer your question on what to do on the filing because I am not sure what the Franchise Tax Board will accept! I strongly recommend that you call the Franchise Tax Board at (888)-792-4900 and give them the scenario and they will most likely tell you what they will accept without confusing them too much.

I am sorry I am unable to help you on this question.

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Madhu February 3, 2014 at 3:05 pm

Thank you Juliana, I spoke with Franchise tax board and they confirmed that we can amend the 593 to show our respective witholding and that escrow can do the needful. So I have spoken to escrow and hopefully they will file two new 593 to get it amended.

Thank you so much for your recommendation.

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William McMullen December 3, 2013 at 8:43 am

I just sold a house in California for a profit and filled out a CA Form 593-E to withhold the taxes. Where do I report this CA tax withholding on my Federal tax forms?

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Juliana Tu December 3, 2013 at 11:55 am

Unfortunately, I am not able to answer your question regarding where to report the California tax withholding on federal forms. You will need to talk to a CPA or tax preparer. We are a settlement service company and we can’t give any legal or financial advice.

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Sanayo K December 2, 2013 at 12:06 pm

Thank you for all the helpful info.
My boyfriend and I just sold our rental property, which we share, 50/50. When filling out form 593-e, do we divide all the numbers by 2, so that we are each taxed on half? Or do we put the full numbers, and then just write that we each own 50%?
Also, are the transfer tax and escrow fees things that we can consider as being “selling expenses”?

Thank you so much!

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Juliana Tu December 2, 2013 at 1:33 pm

On the 593E form, since you are filing income taxes separately, you should submit one form for each of you individually, so everything would be divided by one-half. If you are selling the property for $300,000, for instance, then you start out on line #1 with your selling price as $150,000 each.

As to the transfer tax and escrow fees, those are selling expenses and can be a part of line #2.

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Kristen November 22, 2013 at 2:10 pm

This is a very informative site. My husband and I are approved for a short sale purchase of a home that was due to close TODAY. Three days ago the Escrow company involved with the transaction informed us that the seller forgot to apply the withholding tax and now there is a $25,000 payment for this tax that is required to close the sale. The seller cannot pay and wants us to pay this tax. Is this customary for the buyer to pay the withholding? Also, they have calculated the tax using the 12.3% on the gain versus the 3.3% on the purchase price. In our case, the 12.3% figures are MORE than the 3.3% figures. We have asked them to change the rate to decrease the monetary burden on us, but the seller’s agent is irate that we even asked about it. Please advise. Thank you so much!

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Juliana Tu November 22, 2013 at 5:22 pm

If the Seller cannot claim the property as his residence then he has to do the withholding to the State. That’s the law. But he is selling it as a short sale, so can he claim that he is selling at a loss and fill out the 593E form so that no taxes are due? Obviously, these are just questions that I have, not knowing the specifics in your information.

It is an error on the Seller’s and his agent’s side that they did not calculate in the withholding tax due early in the short sale. But perhaps the Seller only realized the tax issue when they tried to fill out the 593E form. The short sale lender won’t approve the payment at this late date (if at all) so that’s why they are negotiating with you to see if you will pay. It is not customary for the Buyer to pay the withholding tax. So now it depends on how badly you want the property and how much more you are willing to pay to get the property.

Usually the 12.3% on the gain should be less than 3.33% of the purchase price. I am surprised that in your case it didn’t happen. The Seller must have bought the property at a very low price, put a lot of liens on it during his ownership, and then sold it as a short sale because he couldn’t pay the liens, but the sales price is much higher than his original purchase price.

The real estate agent should not be irate. He should find ways to resolve the issue, even if it means that he shoulder some of the $25,000 himself from his commission. I have seen that happen in short sale cases and everyone divides up the responsibility to pay the shortage.

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Jackie October 26, 2013 at 1:27 pm

my son is taking over the current loan of my primary home and I am moving to my second home in another state. Would i check #1 to qualify for exemption? Thank you in advance for your assistant.

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Juliana Tu October 26, 2013 at 3:23 pm

You asked if you would check #1 to qualify for an exemption. If you are asking about the exemptions on the State of California Withholding Certificate 593C form, #1 states that this property is your principal residence. If this is correct, then you would check that box. I am not sure if this is the form that you are talking about, but if so, then you are correct.

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Chris Song October 24, 2013 at 8:41 am

Hello, I have a questions Real Estate Withholding on a decedent’s trust. I was told that because i’m a successor trustee of my deceased parents trust, they have to withhold 3.33% even when my parents used the property as their principal residence before they died. I was told that the Trust itself is an entity not a decedents estate, therefore, they have to withhold unless we no gain or loss….is this correct?
Also, if one spouse dies in the revocable trust…is it right for escrow to ask for two separate 593C and 1099 ..one for the survivor of the trust and second for the decedent?

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Juliana Tu October 24, 2013 at 1:02 pm

A few years ago we did find out from the Franchise Tax Board that when all Trustees of the Trust have passed and the Trust is now an “Irrevocable Trust” with its own Tax ID number, then the exemption claim that the decedent used the property as a principal residence could not be used. We ask our clients to contact their CPA and get legal financial counsel on the matter of the withholding as we are not in a position to give legal or financial counsel. So your question to us, whether your understanding is correct, I have to say, “yes”, this is what the FTB has told us.

As to the Surviving Trustee of the Trust, if the Trust is a standard one, one Trustee passes and the other one becomes the Surviving Trustee, we usually ask for one 593C and one 1099 form, from the Surviving Trustee of the Trust. We don’t ask for one from the deceased Trustee because the Trust is still Revocable and ongoing.

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Cooya October 22, 2013 at 4:36 am

Hi Juliana,
I recently sold my rental property and my escrow officer gave me the 593 C and 593 E. But I am not a foreigner, do I need to withhold the tax of the capital gain and file the forms?
Your answer is truly appreciated.
Thank you,
Cooya

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Juliana Tu October 22, 2013 at 9:34 am

The Withholding laws put out by the State of California applies to every single property being sold in California, irrespective of whether the Seller (or Buyer) is a citizen or a foreigner. What the law states is that everyone has to prepay the 3.33% tax. However, if they qualify for one of the exemptions (see form 593C) form, then you don’t need to pay. Also, if you can claim a loss or a lower gain, you can pay a lesser amount (or no amount), but you will need to fill out the 593E form.

I always ask my clients to always check with their financial counsel or CPA when it comes to the State of California withholding. After all, this will reflect how the income tax is filed at the end of the year!

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GTWilkins October 21, 2013 at 1:01 pm

what about if the house was a rental, it will be sold at loss, it is selling as under a trust, the grantor is deceased. will it be tax-exempt as under Federal, since all of the Trust properties combined will be under the limit of 5.2 mill$.

thank you

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Juliana Tu October 21, 2013 at 2:28 pm

The State of California requires the withholding for every piece of property that is sold in California. There is only one automatic exemption – if the property is under $100,000. All the rest of the exemptions you have to choose on the 593C form. If the property is selling at a loss, then the 593E form has to be completed and both the 593C and 593E forms given to your Escrow Officer. At the end of the year, the CPA filing the income tax will take into consideration that there was (or not) prepayment of taxes on the income tax return. By the way, the State withholding laws are different and separate from the Federal laws.

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Kanchan July 5, 2013 at 8:52 pm

Are requirement similar for federal?

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Juliana Tu July 8, 2013 at 10:47 am

The Federal withholding regulations are different from the state withholding regulations. The State of California wants to withhold for income taxes on all properties being sold unless they qualify for certain exemptions. The Federal government wants to hold for income taxes on all properties being sold in which the Seller is a foreigner. Please see the attached 2 links on our website for a discussion on the 2 different withholdings: and .

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Tania March 21, 2013 at 4:36 pm

Thank you for your information regarding real estate withholding. I just have som remaining questions. I’m in the process of short-selling my rental home. I’m not expecting to claim a loss or a gain. The bank has forgiven the outstanding difference between the original mortgage price and the new short-sale price. I checked #3 on form 593C which states that have a loss or zero gain and requires that I complete Form 593E which is asking me to demonstrate my $0 gain or loss. I don’t understand why I need to go through these steps if we’re going through a short sale. Thanks.

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Juliana Tu March 21, 2013 at 8:42 pm

The 593 C and 593 E forms are required forms by law by the State of California because the property you are selling is a rental and not a principal residence. You must complete them, even though you are doing a Short Sale because the State of California Franchise Tax Board does not know you are doing a short sale until you do your income tax return at the end of the year. It is a requirement that the form be submitted to the Escrow Holder in the transaction so that it is on file should the Franchise Tax Board audit your file. By the way, even though the Lender forgave your outstanding loan difference, you are actually taking a loss. The loss is the outstanding loan difference.

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SP June 8, 2013 at 12:58 pm

I have the same situation, but it is not a rental. The bank has finally accepted a short sale, which means we are experiencing a loss ($1.8M owed vs. $900k short sale price). It was my primary residence from July 2006 to Dec 2010 when I then moved out of state due to employment. I have established residency in the other state but have only rented a home since then. Does this still qualify as my primary residence now that we are finally in escrow and which boxes do I check on the form593-C?

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Juliana Tu June 8, 2013 at 8:17 pm

The exemption of California tax withholding at the time of sale applies if you you can check any of the boxes in the 593C form. The form has a 2 page explanation attached to it which you can review to ascertain if you can check any of the boxes. The principal residence parameters I beleive calls for you claiming this property as your principal residence 2 out of the 5 years preceding the sale so I would think that you would qualify and you can check Box 1 or 2. In addition, since this is a short sale, you can also check the box stating that your are selling this property at a loss, which is box #3. If you check this box then you will also have to submit form 593E, which you can ask your Escrow Officer for.

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Ken Yuen January 27, 2013 at 9:02 pm

Hello Juliana,
I found your website very helpful but we have one more question regarding FIRPTA. We own a house in California with both husband and wife’s names on the deed as joint tenancy and we are going to sell the house, do both of us (foreigners) need to apply for TIN number and submit to escrow for the 10% withholding? Can one of us apply for the TIN number and do it alone?
Thank you very much for your help.
K. Yuen

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Juliana Tu January 27, 2013 at 10:03 pm

With regards to foreigners and their real property investments, when they are ready to sell the property one of the Sellers must have a tax id number. It is not necessary for both. Please do apply for one as soon as you can as it can take the IRS 6 to 8 weeks to process. In addition, you will need it for the State withholding program. That withholding is 3.33% of the sales price.

Let us know if you have any other questions we may answer!

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suzanne underwood October 29, 2012 at 11:43 pm

Hi,
Thank you for your article. I am selling an investment property in California. I am taking a loss but must pay capital gains taxes because I refinanced and took cash out. I was happy to find that the 9.3% capital gains will be less than the 3.33% sales tax on the purchase price.

My concern is that your article is not dated. Is this information current?

Thank you. You have a pleasant website, very easy to follow.
Suzanne

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Juliana Tu October 30, 2012 at 2:05 pm

Thank you for leaving a question on our Viva Escrow website.
The Franchise Tax Board rules and regulations on the withholding of Seller’s funds for pre-payment of income taxes as posted on our website has not changed. The article that we have is dated this year. However, if you have additional questions or concerns, may I recommend that you access the FTB’s website at https://www.ftb.ca.gov/individuals/wsc/California_Real_Estate.shtml

Through your escrow transaction your Escrow Officer should be providing you the 593 C, 593 E and 593 forms for you to complete. Be sure you ask them for it if they do not.
Thank you!

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