Law Advocate Group, LLP 
In California, real estate transactions involve various tax implications, including withholding requirements. For pass-through entities such as LLCs, partnerships, and S corporations, understanding how Real Estate Withholding Credit (REWC) works is essential to avoid overpaying state taxes. In this blog post, we’ll break down how real estate withholding applies to pass-through entities and how you can claim credits to offset your tax liabilities.
What Is Real Estate Withholding?
Real estate withholding is a prepaid tax obligation required by the California Franchise Tax Board (FTB) when a property is sold by a nonresident or an entity. The goal is to ensure that California collects its share of capital gains taxes from real estate sales.
How Does It Affect Pass-Through Entities?
Pass-through entities, including partnerships, LLCs, and S corporations, are not taxed at the entity level but instead “pass through” income to their owners or shareholders. When these entities sell real estate, they may be subject to withholding taxes, which can be used as a credit against their California tax liability.
Who Is Subject to Real Estate Withholding?
The withholding requirement applies when:
- The seller is a nonresident of California.
- The entity does not qualify for a withholding exemption.
- The sales price meets the threshold set by the Franchise Tax Board (FTB).
Exemptions from Withholding
Some pass-through entities may qualify for withholding exemptions, including:
- Entities that file California tax returns and pay state taxes.
- Sellers who qualify for the $100,000 de minimis exemption.
- Transfers that involve tax-deferred exchanges under IRS Section 1031.
How to Claim a Real Estate Withholding Credit
If a pass-through entity has real estate withholding, it can claim the withholding credit when filing its California tax return (Forms 565, 568, or 100S).
Steps to Apply for Withholding Credit
- Obtain Form 593 – This form documents the amount withheld from the property sale.
- Report the withholding on your entity’s tax return – Include it as a prepaid tax credit when filing your state return.
- Allocate withholding to partners/shareholders – Since pass-through entities distribute income, they must also distribute the withholding credit to members.
- Ensure all partners/members claim their share – Individuals must report their allocated portion of withholding on California Schedule K-1.
Avoiding Issues with Real Estate Withholding
Real estate withholding can become complex for pass-through entities, but you can avoid issues by:
- Working with an experienced tax attorney to ensure compliance with California tax laws.
- Filing all required forms on time to prevent penalties and interest.
- Verifying withholding calculations to avoid overpayment or underpayment.
Real estate withholding credit can help pass-through entities reduce tax liabilities and avoid unnecessary tax payments. If your business is involved in real estate transactions, Law Advocate Group, LLP can help you navigate withholding requirements and claim the proper credits. Contact us today for expert legal guidance on California tax laws.
