Tax Deferred Exchange Topics
Important Information for Real Estate Investors
Sellers Beware!
New “Cal-FIRPTA” law effective January 1, 2003
On September 11, 2003, AB 2065 (amending Revenue & Taxation Code Section
18662) was signed into law, and its repercussions for real property sales are significant,
especially for sellers and exchangers of rental/investment real estate.
Current “Cal-FIRPTA” law in California requires that 3 1/3% of the sales price be
withheld from California real property transactions if the seller is a non-resident of
California. The new law expands the withholding requirement to California residents,
which means that for sales closing on or after January 1, 2003, all individuals who
sell California real property and do not qualify for an exemption are subject to the
withholding.
The following individual sellers are exempted from AB 2065 if:
1. The total sales price of the property does not exceed $100,000
2. The property is the seller’s principal residence (IRC section 121)
3. The sale of the property results in a loss for California tax purposes
4. The transaction is a 1031 tax deferred exchange, with the exception of boot
5. The property is involuntarily converted (IRC section 1033)
6. The property was acquired by certain foreclosure methods
The new law also does not apply to a host of non-individual sellers; most notably,
Corporations with a permanent place of business in California, Partnerships or LLCs;
Irrevocable trusts with a California trustee, or Estates with a California decedent.
Grantor (Revocable)Trusts, however, are not considered to be entities for taxable
purposes, so such entities will not be automatically exempt for AB 2065.
Unlike the previous “Cal-FIRPTA” law, The Franchise Tax Board will not grant
individuals a waiver or reduced rate of withholding for sales with small taxable gains: the
full 3 1/3% of the total sales price must be withheld even though the sale will only result
in a small gain. The waiver process, however, will still be available for non-individuals.
Regarding 1031 exchanges, the new law will not apply if the purchaser or Qualified
Intermediary relies on “a written certificate executed by the transferor, certifying under
penalty of perjury” that the California real property will be exchanged pursuant to IRC
section 1031. If a 1031 exchange client does not identify replacement property within
45 days, or purchase identified replacement property within 180 days, from the transfer
date of the relinquished property, the Qualified Intermediary will be required to withhold
and remit 3 1/3% of the sales price to the Franchise Tax Board before returning the
remaining amount of equity to the Exchanger.
The Qualified Intermediary must also withhold and remit 3 1/3% of any cash or cash
equivalent (“boot”), that an Exchanger receives in an exchange; however, unlike the
previous law, which did not require withholding if boot was below $1500, AB 2065
requires withholding on all levels of boot received.
Although the withholding requirement is technically the buyer’s responsibility, in most
cases the title/escrow company closing the transaction will perform the necessary
withholding, and provide the transferor/transferee with the new necessary tax forms.
Because AB 2065 applies to all individual California sellers of investment/rental real
estate, not just non-residents, Exchangers and their agents should be ready to properly
execute and complete an exchange pursuant to IRC Section 1031. Further, sellers who
are unsure if they should exchange or “cash out” should consider the effects of AB 2065
before making their decision.
There are many more aspects of AB 2065 that can be discussed. An excellent source
of substantive information is available at www.ftb.ca.gov. The Franchise Tax Board
also invites you to call them at 1-888-792-4900, or e-mail them at nrws@ftb.ca.gov.
This 1031 Exchange Information is provided in conjunction with:
First Guaranty Exchange
AND Dennis Crawford, Keller Williams Realty
(800) 833-4343 ask for Amy Pool
(925) 766-1031
First Guaranty Exchange is a Qualified Intermediary. First Guaranty Exchange, Dennis Crawford, and Keller Williams are precluded
from giving tax or legal advice. You must consult with your tax or legal advisor about your specific circumstances.
Dennis Crawford
Real Estate Consultant
3021 Citrus Circle, Suite 100
Walnut Creek, CA 94598
925-766-1031
Fax 925-906-0702
denniscrawford@comcast.net
Integrity. Trust. Commitment.