Federal and California Withholding- What You Need To Know

When a person sells real property in CA, the buyer of that property is generally obligated to deduct and withhold 10 percent of the sales price and transmit it to the Internal Revenue Service (IRS) under the Foreign Investment In Real Property Tax Act (FIRPTA) and 3 1/3 percent of the sales price to the Franchise Tax Board (FTB) under CA Revenue and Taxation Code section 18662 and 18668, unless an exemption applies.

Federal Withholding and Nonforeign Affidavit
There are 3 major exemptions to FIRPTA:

1. Seller furnishes buyer a “nonforeign status affidavit” containing the seller’s tax identification number or social security number (CAR form AS or equivalent);
2. The property sales price is no more than $300,000, and the buyer or a member of buyer’s family intends to use the property as a personal residence for at least 50% of the time during the first two years; or
3. IRS issues a withholding certificate to the foreign seller.

When the seller is not a non-resident alien, the seller shall furnish the buyer with a Seller's Affidavit of Nonforeign Status (CAR Form AS or the PRDS equivalent) containing the seller's social security number or taxpayer ID number. For sellers who do not want to disclose their social security numbers to their buyer, the federal law allows them to give their tax credentials to a "qualified substitute," who in turn, furnishes to the buyer a Qualified Substitute Declaration of Possession of Transferor's Affidavit of Nonforeign Status (CAR Form QS). A "qualified substitute" is typically the escrow or title company.
As a default under the purchase contract, the seller is obligated to deliver the AS or QS form within seven days after acceptance to escrow if they have agreed to be the qualified substitute, or to the buyer. Failure to do so will render the seller in breach of the CAR purchase agreement.

California Withholding
CA has the following state specific exemptions for buyer withholding:

1. The property sales price is no more than $100,000;
2. The sale of an individual’s principal residence or property last used as a principal residence;
3. The sale of a decedent’s principal property by the estate;
4. The sale of property by corporation with a permanent place of business in CA;
5. A 1031 exchange;
6. An involuntary conversion under IRC section 1033;
7. The sale of property at a net loss; or
8. seller's tax liability, calculated at the maximum rate (currently 12.3%) on the taxable gain, regardless of seller's actual rate, will be less than 3 1/3%of the gross proceeds and seller certifies that fact under penalty of perjury. 

Note that the AS Form is no longer applicable to be used as a seller affidavit for California withholding. The escrow will oversee the completion of necessary seller affidavit for California withholding. The seller will have to complete the FTB form 593, where the seller certifies, under penalty of perjury, that he or she qualifies for one of the CA withholding exemptions, and the escrow is required to verify the seller’s certification.