A BIG issue in California!
Apparently there is now a law in CA which extracts a 3.3% withholding tax on investor property transfers. AND.. that's 3.3% of the selling price, not just the profit!
So... here's a scenario:
I put a deal in escrow. I do a double closing and wholesale the house to an investor. WHO of the three parties gets whacked for the 3.3%?
$cash$ ? anybody ?
Thanks in advance - BigB
BigB,
First, take a deep breath! It's not quite as bad as it seems.
1. The 3.3% tax is an advance withholding on your state income tax.
2. The tax will be paid by the seller. So at a double closing, the party selling you the property will get "whacked", and you will also get "whacked" when you wholesale it to an investor.
3. The tax can be avoided by closing all your deals OUT OF ESCROW! The tax is only required to be withheld by an escrow company.
4. Also, only private parties will get "whacked" with the new tax. If you take ownership of the property via an LLC or an irrevocable living trust you don't have to pay the tax!
5. Read the article at this site for more info: http://www.foreclosureforum.com/index.html
Hope this helps.
[addsig]
bigburrito,
Glad to meet you.
What I would add is make sure you are set up with the proper corporate entity or trust and then clear it with your tax advisor on how you are intending to hold title to the property and sell it.
I still think a person needs competent legal and tax advice to help them in their career. California is triple tough so this is one State I would be sure I am doing it right in.
Welcome on board this board, keep posting plenty of posters here to help you get going in the right direction.
John $Cash$ Locke
Thanks to you both -
It seems to me that the "outside of escrow" option would be the simplest way. That would mean assigning (selling) my contract, right?
Assuming that's correct, I'd have to get cash before the closing, and wouldn't be involved in the escrow at all, beyond the fact that I was the one who opened it .
Comments?
Thanks again....
Does anyone know when did it became a law or regulation, whatever it is?
Here is the thing, if you do a double closing using 2 separate contract, you as a buyer do not have to have founds withheld but since you are the seller to your (new) buyer, meaning you must take the title for a moment before the title is turned to a new buyer's name, you would be in the withholding loop. As advised above, set a proper business entity and you'll be OK.
In my opinion, just because you close outside of Escrow, does not mean you don't owe the tax. California is just doing everything they can to make money.
Robert
[addsig]
I usually (like to) concentrate on making money and let the tax attorney do the tax dance. Uncle Sam loves it and neither I not he does object.
Money Talks! Listen and learn...[ Edited by HaystagREI on Date 06/03/2004 ]
a couple f/u questions
Is it only escrow companies that must withhold or title ins. as well.
As to closing out of escrow, I have never heard of this being done.
Don't you worry about title insurance?
To answer a few posters questions on this new tax law.
1) Effective January 2004 in California
2) 3.33% rate on sale price to State tax on total price IF you made a profit.
Cheryl Lopez