The California withholding tax is very similar to federal government’s FIRPTA withholding. The idea is that if you aren’t a California resident, and consequently file your income taxes somewhere else- California wants to make sure that you pay taxes on any potential gain on sale of your California property.
The franchise tax board form that is used to file California withholding tax is 593 California Withholding Tax form. The tax can be calculated two ways: 3 1/3% of the TOTAL sales price or 9.8% of the gain of sale. If you sold your property for $1,000,000 the CA withholding would be $33,000- no small number! The good news is that most sales are exempt from withholding, and if they are not, some careful forethought before the sale and meeting with an accountant can get around the withholding.
It is also important to note that the 3 1/3% withholding may turn out to be way more than your actual tax. This is common; the state of California mails you a rebate check for the difference. Attach form 593-B with your California Income tax return. I have no idea how long it takes for the state to send this rebate, I don’t think it would be quicker than six months. As you can imagine, you would rather avoid this withholding if possible.
Form 593-C, lists exemptions to California withholding tax. Exemptions are called certifications, don’t ask me why. Part II Certification 1 is the certification everyone knows- “If you have lived in the property as your primary residence for two or more years in a five year period you are exempt.” The certification that people miss is Part II certification 2, “the seller last used the property as their primary residence without regard to two-year time period.” This means that if you were living in the property before you sold it, you are exempt from withholding.
Part II section 2
I want to give a warning of caution. Escrow companies in their escrow instructions usually assign themselves the right to handle California Withholding Tax if it applies. Escrow people are not accountants, and don’t know any more than you or me about the tax code. I am sorry to say, but escrow companies withhold seller’s proceeds because of the California Withholding tax in ERROR every day, so be on guard.
If you qualify as exempt from California withholding tax, all that needs to be done is fill out form 593-C and escrow will keep the form on file with the rest of the transaction paperwork, and they can release the funds. Keep in mind that this doesn’t exempt you from paying taxes if there was a taxable gain- it just means that you won’t have a large portion of capital tied up due to withholding.
Here is an example of how the Withholding is calculated: