1. California Changes 3.3333% Mandatory Withholding Requirement
On Sale Of Real Estate
California Assembly Bill AB 2962 was approved and signed into law by California Governor Arnold
Schwarzenegger on September 22, 2006.
California's current income tax withholding law enacted in 2002 and effective January 1, 2003 under
Governor Davis requires a mandatory income tax withholding requirement of 3 1/3% based on the
gross sales price on the disposition (sale) of real property under certain circumstances.
"The problem with California's current income tax withholding law is that the calculation of the
mandatory withholding requirement of 3 1/3% is based on the taxpayer's gross sales price and bears
absolutely no relationship to the taxpayer's actual capital gain income tax liability," said William L.
Exeter, president and chief executive officer, Exeter 1031 Exchange Services, LLC. Mr. Exeter further
stated, "It actually causes over-withholding for many taxpayers."
Assembly Bill AB 2962 amends Sections 18662 and 18668 of the California Revenue and Taxation
Code with regards to the mandatory withholding requirements on the disposition (sale) of real estate
by certain taxpayers. It is designed to reduce the problem of over-withholding by allowing taxpayers
to elect an alternate method for calculating the withholding amount instead of the current 3 1/3%
based on the taxpayer's gross sales price.
Taxpayers will be able to choose a withholding amount based on the maximum income tax rate for
individuals or corporations applicable to the actual capital gain on the disposition (sale) of their real
property. "This solution should eliminate most of the California withholding problems that we have
seen day in and day out," said Mr. Exeter.
Taxpayers will be required to complete a certification under penalty of perjury to the buyer or REEP
(Real Estate Escrow Person, including but not limited to attorney, escrow officer or qualified
intermediary) to elect this withholding method.
Industry professionals may be interested in reading the California Franchise Tax Board's Analysis of
Amended Bill and the Revised Analysis on Assembly Bill AB 2962. Click here for more complete
details and links to text and analysis of AB 2962.
Assembly Bill AB 2962 is effective for dispositions (sales) of California real property closing on or
after January 1, 2007.
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