With California's current budget situation, it's no wonder that the state is reviewing all revenue sources. As a result, out-of-state income property owners may soon find that they owe California income taxes.
Out-of-state owners are required to allow up to seven percent of the gross rent to be held and remitted to the California State Franchise Tax Board (FTB) for all payments that exceed $1,500 in a calendar year. (See R&TC Section 18662)
Under California law, non-residents are taxed on their California-source income: fees, wages, salaries, business income, rents or other income from real estate or other tangible personal property (vehicles, machinery, equipment) in the state.
A non-resident partner of a partnership that has California-source income must either allow their in state agent to withhold up to seven percent of the gross income or file for a waiver with the FTB. The same is true for beneficiaries of a trust or an estate, shareholders of an "S" corporation (a corporation in which the shareholders, rather than the corporation, are taxed) and a limited liability company (usually taxed as a partnership).
If you are a property manager, you must withhold funds and remit them to the FTB on a quarterly basis. Exceptions to this requirement can be secured by the owner. If the owner informs you that they have an exemption, then you should request a copy of the Form 590 Exemption Certificate for your files.
Out of State Property Owners
If you are already paying California Non-resident income taxes you may file for a withholding waiver. Waivers can be requested by using either of the forms below. The forms should be reviewed carefully to ensure that they fit the situation of the property owner(s).
Form 588 Nonresident Withholding Waiver Request - The reasons under which a waiver could be filed are:
- California state tax returns have been filed for the two most recent years in which their has been a filing requirement and the applicant is current on any outstanding tax obligations.
- Estimated tax payments are being made for the current taxable year and the applicant is current on any outstanding tax obligations.
- If the applicant is a corporation without a permanent California address but it's filing a return with a corporation that has a California address.
- If the applicant is a new shareholder of a corporation.
- Other reasons may be presented with substantiation.
Form 589 Nonresident Reduced Withholding Request - This form should be used if Form 588 did not apply to the situation of the property. This form allows the property holder to petition that the withholdings are based on net not gross income.
Though unlikely, tenants could request Form 590 Exemption Certificate, and if you don't have it they could withhold rent to pay your California income taxes. It's recommended that if you self-manage your property from outside of California that you investigate seeking an alternate solution over having your tenant withhold and submit your quarterly income payments.
FTB's Amnesty Program
For our-of-state property owners who have not previously adhered to the FTB requirements, there is the 2008 Nonresident Withholding Incentive Program (NWIP). For a limited time this program allows withholding agents who are first-time filers and remitters of nonresident, non-wage withholding. Eligible withholding agents may remit past-due, 2008 withholding as additional compensation on behalf of the non-resident payee and pay interest by March 16, 2009.
The terms of this 2008 NWIP only cover withholding compliance audits performed by the Withholding Services and Compliance Section and do not cover tax return or other examination or compliance audits performed by other departments within FTB.
For information on this amnesty program go to http://www.ftb.ca.gov/individuals/wsc/Incentive_Program.shtml.