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Here are some real estate related tips from the experts: 


Understanding Withholdings on Real Estate Sales

Source:  California Land Title Association www.clta.org
 
When did withholding start for California residents?
The withholding law applies to dispositions of California real estate by both residents and non-residents which close on and after January 1, 2003. Previously, withholding was only required of non-resident sellers.

Why was this withholding law enacted?
As part of attempting to balance the state budget, this withholding provision was added to legislation on the last day of the Legislative session in 2002.  It was estimated to accelerate collection of $285 million in additional state revenue.

Who is responsible for withholding?
The law requires the buyer (called the transferee) to withhold from what would otherwise be paid to the seller.

What unit at the Franchise Tax Board handles the withholding?
The Withholding Services and Compliance Section handles the withholding.  The phone number is (888) 792-4900.
 
You may check the Franchise Tax Board website both to see how the process currently works and for any updates.  The Franchise Tax Board website currently has guidelines which include over 100 questions and answers.  See FTB Pub. 1016.

How much is the withholding?
The withholding is 3 1/3% of the gross sale price.  It does not take into account costs of the sale such as real estate commissions or other settlement costs. Withholding is currently due by the 20th day of the calendar month following the date title is transferred or may be remitted on a monthly basis in combination with other transactions closed during that month.  California Forms 593 and 593B are used to report and a remit copy must be provided to the seller to attach to their tax return.

What exemptions apply?
If you are an individual selling property, the buyer will not have to withhold from your proceeds if the sale price is less than $100,000, or you are selling your principal residence or if you are selling at a loss.  Other exemptions are for tax deferred exchanges and involuntary conversions of property.

Does the seller have to do anything to qualify for exemptions?
Yes.  The seller will be required to sign a statement under penalty of perjury to establish eligibility for the exemption.

Can the seller apply to the Franchise Tax Board for an exemption?
The law allows applications for reduced withholding and waivers but not by individuals, only by corporations and other entities.

What happens if there are several sellers on title?
If the total purchase price exceeds $100,000.00, withholding rules apply.  To determine the amount of withholding, each owner is considered separately and the withholding is calculated on each owner's pro-rata share of sales proceeds. It is possible for the transaction to be exempt for one seller but not for the other part owners.

How do I know if the property qualifies as my principal residence?
The rules incorporate Internal Revenue Code Section 121 to determine whether the property qualifies as a principal residence.  There are two separate exemptions under California law which relate to the use and ownership tests under Section 121.  Generally, the seller will either have had to have owned and lived in the property for two of the previous five years or the last use will have to have been as the seller’s principal residence.  Note that the two year period may be made up of different blocks of time which add up to two years over the five year period.  A seller who lived in the property for one year, then rented it out for a period of time followed by another year of residency in the property would qualify for the exemption.

What is the role of the escrow holder regarding withholding?
The law requires the escrow holder to provide a notice of the requirements.  The escrow holder cannot make a legal determination as to whether any exemption applies.

Will the escrow agent do the withholding of the seller’s money on behalf of the buyer?
The escrow agent may withhold and remit to the Franchise Tax Board if the parties agree.  The fee for this service may not exceed $45.00.

How will a seller get the withholding returned?
The only way to recover the withholding is by filing a California State Income Tax Return for the year in which the sale occurred.  The seller will be entitled to a refund in the amount that the withholding exceeds the amount of capital gains tax due by reason of the sale.

Does it matter if the seller lost money on other real estate or non-real estate transactions?
No.  Each transaction is considered separately.

What happens if the property is held in trust?
If the trust is revocable, then the rules apply as if the seller was the individual who has the power to revoke the trust.  If the trust is irrevocable then the trust itself is treated as the seller and withholding may be required if there are no exceptions.

What type of real estate is covered by the law?
All real estate interests are covered unless one of the exemptions applies.  This means the sale of fee title or easements or other interests may be subject to withholding.

The Title Consumer is published by the California Land Title Association.  Member companies of the California Land Title Association are dedicated to facilitating the transfer of real property throughout California and increasing the public's awareness of the value and purpose of title insurance.
Section 1031 Exchange FAQs

Source:  Federation of Exchange Accommodators / www.1031.org

Every Section 1031 Exchange transaction is different. These "Frequently Asked Questions" are intended to answer general inquiries. The application of these principles will depend on the specific facts of each transaction. Always consult a competent Qualified Intermediary, attorney, or tax advisor to determine how an exchange may best be structured to accomplish your investment objectives.
 
Q - What is a tax-deferred exchange?
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.
 
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.
 
The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.
 
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

Q - What are the benefits of exchanging vs. selling?
  • A Section 1031 exchange is one of the few techniques available to postpone or potentially eliminate taxes due on the sale of qualifying properties. 
  • By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
  • Any gain from depreciation recapture is postponed.
  • You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
Q - What are the different types of exchanges?
  • Simultaneous Exchange: The exchange of the relinquished property for the replacement property occurs at the same time.
  • Delayed Exchange: This is the most common type of exchange. A Delayed Exchange occurs when there is a time gap between the transfer of the Relinquished Property and the acquisition of the Replacement Property. A Delayed Exchange is subject to strict time limits, which are set forth in the Treasury Regulations.
  • Build-to-Suit (Improvement or Construction) Exchange: This technique allows the taxpayer to build on, or make improvements to, the replacement property, using the exchange proceeds.
  • Reverse Exchange: A situation where the replacement property is acquired prior to transferring the relinquished property. The IRS has offered a safe harbor for reverse exchanges, as outlined in Rev. Proc. 2000-37, effective September 15, 2000. These transactions are sometimes referred to as "parking arrangements" and may also be structured in ways which are outside the safe harbor.
  • Personal Property Exchange: Exchanges are not limited to real property. Personal property can also be exchanged for other personal property of like-kind or like-class.
Q - What are the requirements for a valid exchange?
  • Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and choses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.
  • Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.
  • Like Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States.
  • Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.
Q - What are the general guidelines to follow in order for a taxpayer to defer all the taxable gain?
  • The value of the replacement property must be equal to or greater than the value of the relinquished property.
  • The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
  • The debt on the replacement property must be equal to or greater than the debt on the relinquished property.
  • All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.
 
For more Frequently Asked Questions, please visit
 Deciding To Sell

 Source http://www.car.org/aboutus/forconsumers/selling/decidingtosell/ 


You've probably already considered your personal reasons for selling. Now you need to take into account the other factors involved, such as market conditions, your property's value and tax implications. Unless you're locked into selling your home (e.g., you've already accepted a job offer in another city), it's a good idea to look at the whole picture before deciding to sell.


Assessing Market Conditions


There's a rule of thumb to keep in mind when deciding to sell your home: Your home is only worth what a qualified buyer is willing to pay at the time it's on the market. The current real estate market fluctuates based on supply and demand, interest rates, general economic conditions, and other factors. The same house may sell for more or less under a different economy. Your REALTOR® can inform you of the going price for homes in your area at the current time; this data is included in a comparative market analysis (link to Appraisals and CMAs).


Tax Implications of Selling


There are many dynamics that can affect your tax liability upon selling your home. These issues include whether you purchased the home or inherited it, if you used your home for business or rental purposes, costs associated with selling your home, and any home improvements and additions that you've undertaken.

The Federal Taxpayer Relief Act of 1997 provides capital gains tax exclusions of up to $500,000 for married taxpayers filing jointly and $250,000 for single taxpayers or married taxpayers filing separately. Current capitol gains rates are 20 percent for those in upper tax brackets and 10 percent for those in lower tax brackets. Overall capital gains rates have been lowered even further -- to 18 percent and 8 percent respectively -- for assets acquired after December 31, 2000, and held five years or more.


To qualify for this tax break, you must have used the home as your primary residence for at least two of the prior five years; these two years don't have to be consecutive. If you relocate for your job but don't meet the requirement, you may be allowed to take a capital gains exclusion proportionate to your circumstances. This exclusion is not a one-time benefit; you may take advantage of it once every two years as long as you meet the qualifications.

The tax rules differ when you sell a home that you've inherited. If you sell the inherited home for a profit, you're required to pay federal and state taxes on the gain. If you keep the house as a second residence and/or eventually move into it after renting it to tenants, you may take the $250,000/$500,000 capital gains tax exclusion if you meet the requirements. When you're deciding what to do with inherited property, you should consider the current estate tax laws and basis practices.


Beyond these general rules, it's wise to discuss your home's sale with a tax professional who can advise you on tax benefits in more detail.


Timing Your Decision to Sell


Because most sellers finance a new home purchase with the sale of their present home, they usually put their homes on the market before they begin their search for a new home. Learning the price you can expect from the sale often sets the pricing parameters for your new home search.


Obviously, it's not wise to wait until the sale on your property closes completely before beginning to look for your new home. Timing your search properly with the buyers' transaction can make the difference between having the available funds to buy a new home and cutting down on the interim period between homes.