How much will new tax cost homeowners? How much will new tax cost homeowners? (February 21, 2003)

By J. Robert Taylor

Q: I have a house that I currently own as an investment property and have recently read that there is a new tax that the State of California is imposing on all sales. How much will this new tax cost me?

A: You are referring to a new withholding requirement as of Jan. 1, 2003, under Revenue and Taxation Code Section 18662, which applies to most transfers other than a sale of your personal residence. Since you are selling investment property you will be subject to the tax withholding law. This means the escrow company will withhold 3 1/3 percent of the sales price and send those funds to Sacramento, regardless of your actual tax liability. Once you file your tax return you will be given a refund from the withholding of any overpayment.

You may be able to avoid the withholding if you are doing a tax-deferred exchange under IRS Code Section 1031. However, almost all other sales are subject to the withholding tax including the sale of vacation or second homes. This was a clever mechanism devised by our legislators to temporarily bridge the revenue gap due to the recession. For further information, please consult your professional tax advisor.

J. Robert Taylor, J. D., a real estate attorney and broker for more than 20 years, has served as an expert witness and mediator and is on the judicial arbitration panel for Santa Clara County Superior Court. Send questions to Taylor c/o Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA, or via e-mail at btaylor@taylorproperties.com.