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TAXES
CHICAGO TITLE CALIFORNIA BUYER & SELLER GUIDE
There are many types of tax issues that should be considered during a real estate transaction. Chicago Title provides the following information as a resource only and always recommends that a seller and buyer consult with their legal and tax professionals for advice.
Topics we will briefly overview which may be a part of, or a result of, your escrow include:
• Capital Gains Tax
• Change of Ownership Filing • Transfer Tax
• California Withholding
• Property Taxes
• Supplemental Taxes
• Mello Roos
The Internal Revenue Service (IRS) provides free publications that explain the tax aspects of real estate transactions. A few of these include:
• Publication #523: Selling Your Home • Publication #530: Tax Information for
Homeowners
• Publication # 544: Sales and Other
Dispositions of Assets
• Publication #551 Basis of Assets
Federal Requirements
The IRS requires that escrow agents report certain information pertaining to sales of real property. Under the Tax Reform Act of 1986, reportable transactions include sales and exchanges of properties including, but not limited to, houses, townhouses and condominiums.
Also reportable is stock in cooperative housing corporations and mobile homes without
wheels. Specifically excluded from reporting are foreclosures and abandonment of real property, as well as financing or refinancing of properties.
The escrow officer, as the settlement agent, will ask the seller to complete a substitute 1099S form, which may be required by the IRS. The seller
is required to provide their correct taxpayer
identification number (social security number), as well as the closing date of the transaction and gross proceeds of the transaction.
Withholding Requirements
Some states, such as California, require that certain sellers “prepay” their required state capital gain taxes through withholding of
a percentage of the sale proceeds. State
law requires the buyer to accomplish the withholding, and the buyer may be subject to penalties for failure to withhold and send the appropriate amount to the State Franchise
Tax Board. However, the buyer may delegate
this responsibility to the escrow holder, and the escrow holder may charge a fee for this service. The law requires the escrow agent to give written notice of the withholding requirement to the buyer.
Some sellers will qualify for an exemption to the withholding law. Here are some of the exemption situations:
• Principal residence
• Property that is part of a like-kind exchange • Sales price is $100,000 or less
• Sales that result in zero gain or loss for state
tax purposes
• Property owned by certain corporations and
partnerships
• Property ownership by tax exempt entities
The escrow holder will provide a state withholding form to the seller to help determine if any of the exemptions apply. The withholding guidelines can seem quite complex, but your escrow officer has forms and educational materials to help your clients or contact the California Franchise Tax Board.
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