When real estate is sold in California, the state requires that income tax for that sale must be withheld. In this post we will discuss sellers who are individuals or who may qualify as an individual. We will also explain qualified exceptions and exemptions to withholding.
What is the 593-C Form?
The seller will need to fill out the State of California Real Estate Withholding Certificate, form number 593-C. The escrow company will provide this form to the seller, typically when the escrow instructions have been prepared and sent out for signatures.
Completing the 593-C Form
The standard amount of taxes to withhold is equal to 3 1/3% of the total sales price. (Note: If the seller is claiming an exemption by filling out the 593-E form, the percentages will be different on if it is reduced withholding. Those percentages are reflected on the form itself.)
If the seller is an individual, enter the social security number (SSN) or individual taxpayer identification number (ITIN) as indicated on the 593-C form. If the sellers are spouses/registered domestic partners (RDPs) and plan to file a joint return, enter the name and SSN or ITIN for the spouse/RDP on the 593-C form in the space provided. If there is more than one seller and the sellers are not married/RDPs, then each seller must complete their own 593-C form.
Entities That May Be Considered “Individuals” by the Franchise Tax Board
Single Member LLC:
If the seller is a single member disregarded LLC, enter the name and the tax identification number of the single member.
A grantor trust is created when the trust is formed by the grantor(s) and the grantor(s) are also the trustee(s) of the trust. A good example of a grantor’s trust is a Family Trust. The grantor trust is disregarded for tax purposes and the individual seller must report the sale and claim the withholding on his/her/their individual tax returns. If the trust was a grantor trust that became irrevocable upon the grantor’s death, enter the name of the trust and the trust’s federal employer identification number (FEIN) on Form 593-C. Do not enter the decedent’s name or trustee’s name or SSN.
Exceptions to Withholding
Certain real estate transactions are exceptions to state income tax withholding. The exceptions are:
- the total sales price is $100,000.00 or less;
- the property is being foreclosed upon pursuant to a power of sale under a deed of trust, or sold by a deed in lieu of foreclosure;
- the transferor is a bank acting as a trustee other than a trustee of a deed of trust;
- the seller certifies to an exemption.
Exemptions to Withholding
There are several exemptions. The most common exemption is the seller’s principal residence as set forth under Internal Revenue Code (IRC) Section 121. Generally speaking, the seller must have owned and lived in the property as their main home for at least two years during the five-year period ending on the sale of sale. Another exemption would be a loss or zero gain. Claiming this exemption will require form number 593-E to be filled out and signed by the seller.
If any of the first three exceptions are applicable, the seller checks the appropriate exception on the 593-C form and signs the form. If the seller checks number 4 on the 593-C form, claiming an exemption, there is an additional form which will need to be filled out.
The California Franchise Tax Board website has provided more information with a complete list of exemptions, as well as forms 593-C and 593-E.
It is always important for the seller to check with their tax advisor when filling out the 593-C and it is even more important if the seller is filling out a 593-E exemption form.