How to Accurately Complete CA Form 593 for Real Estate Withholding

Completing California Form 593 is a critical step in real estate transactions involving withholding taxes for nonresident sellers. This form ensures compliance with state tax laws and helps avoid penalties or interest charges related to underpayment. Understanding how to accurately fill it out can save significant time and money.

This guide covers the key aspects of CA Form 593, including requirements for involved parties, calculation methods, and steps for completion.

Transaction Criteria for Withholding

In California, withholding is required when a property is sold or transferred by a nonresident seller. This process ensures the state collects taxes on income from the sale of real estate by nonresidents, as outlined in the California Revenue and Taxation Code Section 18662. It applies to all property types, including residential, commercial, and industrial.

Withholding depends on the seller’s residency status. Nonresident sellers generally must withhold unless exemptions apply, such as when the sale price is under $100,000 or if the property qualifies as the seller’s principal residence under Internal Revenue Code Section 121. Transactions involving tax-exempt entities or those covered by a tax treaty may also be exempt.

The withholding amount is based on either the total sales price or the gain on the sale. The standard rate is 3.33% of the total sales price or 12.3% of the gain. Buyers and escrow agents must determine the correct withholding amount accurately, as errors can lead to penalties and interest.

Nonresident Seller Requirements

Nonresident sellers—individuals or entities without a permanent residence or business presence in California—must meet specific withholding obligations.

Sellers must provide accurate documentation, including a completed Form 593-C, Real Estate Withholding Certificate, to the buyer or escrow agent. This form declares the seller’s residency status and any exemptions. Errors can delay transactions or cause disputes. Noncompliance with withholding requirements may result in penalties.

The withholding tax must be sent to the California Franchise Tax Board (FTB) by the 20th day of the month following the transaction. Late payments incur interest charges. Sellers should consult tax advisors or legal counsel to ensure all documentation is accurate and submitted on time.

Withholding Rate and Calculation

The withholding rate for California real estate transactions involving nonresident sellers ensures taxes are collected on capital gains. For the 2024 tax year, the standard withholding rate is 3.33% of the total sales price. This rate applies directly to the gross selling price.

Alternatively, sellers may calculate withholding based on 12.3% of the recognized gain from the sale, which can reduce the withholding obligation if the gain is significantly lower than the total sales price. Sellers and their financial advisors should analyze the transaction to determine the most advantageous method. Proper documentation is essential, as the California Franchise Tax Board may require verification.

The choice between sales price or gain-based withholding often depends on the seller’s broader tax strategy. Sellers anticipating significant deductions or credits may prefer the gain-based calculation to optimize cash flow. Consulting with knowledgeable tax professionals can help sellers navigate these decisions.

Steps to Complete the Form

To complete CA Form 593, gather all transaction details, including the final closing statement, which lists the total sales price and other financial elements necessary for calculations. Accurate data ensures the form is filled out correctly.

Enter the seller’s information, including full legal name, tax identification number, and address, as well as the buyer’s details. Both parties are responsible for ensuring the form is submitted correctly.

Handling Overpayment or Underpayment

Discrepancies between the withheld amount and the seller’s actual tax liability can lead to overpayment or underpayment. Overpayment occurs when the withheld amount exceeds the seller’s tax liability, while underpayment results in insufficient funds withheld, potentially triggering penalties and interest.

For overpayments, sellers can file Form 540NR, California Nonresident or Part-Year Resident Income Tax Return, to reconcile withholding with the final tax liability. Supporting documentation, such as a copy of Form 593, must be included. Ensuring figures on Form 593 match those on the tax return avoids processing delays.

In cases of underpayment, the FTB will issue a notice detailing the shortfall, including penalties and interest. Sellers should promptly address this by submitting the outstanding amount with Form FTB 3582, Payment Voucher for Individual e-filed Returns, or through the FTB’s online payment system. To prevent underpayment, sellers may request a reduced withholding amount in advance by filing Form 593-E, Real Estate Withholding—Computation of Estimated Gain or Loss.

Correction and Resubmission

Errors in completing or filing CA Form 593 can result in delays, penalties, or rejected submissions. To amend a previously filed form, complete a new one and check the “Amended” box. Include all correct information, not just the changes, as the FTB requires a complete resubmission. Attach a written explanation detailing the reason for the amendment and any supporting documentation.

Submit the amended form promptly to avoid penalties or interest. If the correction increases the withholding amount, the payment must accompany the resubmission. If it reduces the withholding, the seller may claim a refund when filing their annual tax return. Clear communication with the escrow or withholding agent is essential during this process, as they may assist in preparing or submitting the corrected form.