California Form 593; a familiar title for anyone who has sold or purchased property in the golden state. The Real Estate Withholding Tax Statement is used to declare gains made from a transfer of real property. When filing this tax there are two methods of calculating the necessary payment. The first is called “Total Sales Price Method” and is calculated using the total sales price, boot, or installment sale payment and multiplying it by 3 and 1/3 percent. The second calculation, “Optional Gain on Sale Election” is the topic this article.
Recently, in a transaction involving a property with an adjusted basis of around 1.5 million dollars, William Severi, co-owner of North Bay Property Advisors, was able to save his client almost $40,000 by using the “Optional Gain on Sale Election” calculation. This calculation takes into account the most accurate estimate of personal gains on the sale of a property and multiplies that number by the given percentage. In most cases this number turns out to be significantly lower than calculating using the total sales method. Generally, when using the total sales method on a property with a large purchase price, the tax payer receives a tax return at the end of the fiscal year. However, the problem is the amount of time between when one pays the Real Estate Withholding tax and when the government pays out tax returns. There is a simple principle in investment where the investor needs funds on hand in order to invest…obviously. That being said, if the capital gained from a sold property is tied up in a poor Real Estate Withholding estimate, than you are unable to use that money to fund future investment opportunities. The bottom line is to never believe the idea that receiving money now or receiving money later will have no income producing or reducing effect. Even if the money gained from selling property simply sits in a savings account it still gains interest. Therefore, it is of critical importance to calculate the lowest and most accurate number when paying the Real Estate Withholding tax as it could pay immense dividends. Below is an example 593-E Real Estate Withholding computation form using the “Optional Gain on Sale Election” calculation method.