sacramento report
Long-Distance Landlords
by Monica Guillén
Regular readers of the “Sacramento Report” may recall our reports earlier this year about a new nonresident withholding requirement. We first brought this issue to you in February 2009, after the Franchise Tax Board issued new tax withholding guidelines requiring property managers who manage property in California for nonresident owners to withhold a percentage of the rent each quarter and forward these funds to the FTB.
After learning of the FTB’s intent to begin collecting this new withholding, CAA staff met with FTB officials to discuss the industry’s concerns. As a result of that meeting, the FTB agreed to delay implementation of its withholding requirement. According to the FTB’s public statement, issued after the joint meeting with CAA, the FTB established a goal of full compliance with the withholding requirement by 2010.
Withholding Requirement
Pursuant to the withholding requirement, property management companies that manage property for nonresident owners must withhold 7% of the gross rent payments derived from property in California (less expenses separately accounted for and not subject to 1099 reporting) each month.
Then on a quarterly basis, the management company must forward those funds to the FTB along with the required FTB forms.
Exceptions
- The withholding is not required if one of the following exceptions is met:
- The individual, S corporation shareholder, or partner is a California resident;
- The payee meets one of the exemptions on FTB Form 590;
- The total payments or distributions of California source income to the nonresident are equal to or less than $1,500 for the calendar year;
- The nonresident payee or the withholding agent receives written authorization from FTB, waiving the withholding; or
- The payee is a bank or banking association.
Under the FTB rules, “withholding” is a prepayment of California state income or franchise tax (similar to wage withholding). The withholding agent (that is, in-state property management companies) may use a “reasonable method” to calculate the withholding. The withholding agent may deduct their management fees and other property expenses before calculating the withholding.
In addition to the above exceptions, the following individuals and entities are exempt from the withholding requirement:
- California residents;
- Corporations with a permanent place of business in California;
- Corporations qualified through the Secretary of State to do business in California;
Partnerships and limited liability companies with a permanent place of business in California; - Tax-exempt organizations, under either California or federal law;
- Insurance companies, IRAs or Qualified Pension/Profit Sharing Plans;
California non-grantor trusts; and - Estates where the deceased was a California resident at the time of death.
To assist members in complying with this requirement, CAA has created a question-and-answer document that provides more information about the withholding requirements. This comprehensive document covers the withholding amounts for domestic and foreign nonresident owners, the forms to be used to remit the withholding and procedures for owners to obtain a waiver or exemption from the withholding. The document may be accessed on CAA’s website at: www.caanet.org.
CAA members are urged to familiarize themselves with this new requirement. The penalty for noncompliance becomes the obligation of the property manager who fails to comply, not the out-of-state property owner.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Monica Guillén is CAA’s vice president of public affairs. Copyright © 2009 by Black Point Press. All rights reserved.