Real Estate
Real Estate Withholding Rule Changes and the 1031 Exchange
by Rodney Fitzpatrick

As of January 1, 2003 Assembly Bill 2065 (Chapter 02-488) revised Revenue and Taxation Code Section 18662, requires withholding of 3- 1/3 percent of the sales price of investment property for residents, non-residents and corporations with no permanent place of business in California.

Now you might ask, what is real estate withholding? Real estate withholding is a prepayment of state income taxes for sellers of California real estate. California, like the federal government, has a "pay as you go" tax system, meaning taxes are due as you earn income, not after the end of the year when you file your state income tax return. Real estate withholding will in many cases, save the seller from having to make estimate payments to cover the tax due on the gain on the real estate sale.

All individuals and non-individuals who sell California real property and do not qualify for exemption are subject to withholding. Also those non-individuals with a last known address outside of California who do not qualify for an exemption remain subject to withholding.

What are the exemptions?

• 1031 Exchanges with the exception of boot
• Properties whose sell price does not exceed $100,000
• Principal Residences
• Involuntary Conversions or IRC Section 1033
• Certain Foreclosures
• Sales resulting in a loss for California tax purposes
• Partnerships or Limited Liability Company (LLC)
• Irrevocable Trusts with a California Trustee
• Estates with a California decedent
• Tax Exempt Entities, Insurance Companies, IRAs, Qualified Pension Plans
• Banks or Banks acting as a fiduciary for a trust
• Corporations with a permanent place of business in California

With all of this in mind the big question for accommodators in tax-deferred exchanges is, how will the new law have an impact on the 1031 Exchange industry? In short, the new law requires accommodators to withhold 3-1/3 percent on any cash or cash equivalent (Boot) an individual receives or to withhold 3-1/3 percent of the total sale price if the exchange does not occur or does not meet the requirements of IRC Section 1031. It is good to note that there is no longer a minimum amount of boot that must be received before withholding is required on the boot.

The bottom line is one must put together a good tax strategy and investigate all options before the sell of their investment property. Remember; always consult your tax advisor or CPA before you sell your investment property.

Rodney is a Regional Vice President of Investment Advantage Group a provider of 1031 tax deferred exchange services and property tax solutions. As a member of the Federation of Exchange Accommodators Rodney and IAG provide traditional and innovative tax strategies for the investment property owners. You can call toll free at 888-212-1031, e-mail him at rodney@iag1031.com or find him on the web at www.iag1031.com.