I am often times asked to assist my clients in California with selling their commercial real estate located in other states. It can be a multifaceted project as we need to be aware of broker licensing laws as well as understand the tax ramifications.
Your license isn’t good here – License Laws
The first thing I must consider as a broker is license portability or–what I am allowed to do and not do in each state with my California broker’s license. As a California broker I cannot go to another state, set-up an office and start selling real estate. There are basically three categories of portability: cooperative state, physical location state and turf state.
If the other state is a cooperative state (there are 26) I can physically enter the state to conduct business, but I would need to execute an agreement with a licensed broker in that state which details the activities I can and cannot perform in the state under his or her license. The agreement also dictates how I will be paid.
A physical location state like California (there are 21, including D.C.) is similar to a cooperative state, however I cannot enter the state to represent the transaction such as touring properties, getting signatures, meeting clients and performing inspections. All my activities can only be performed from California.
A turf state is off limits (there are four). I can only refer clients to brokers who have a license in that state.
License portability is not simple and straight-forward as each state has exceptions to these three categories and no two states are alike.
Pay the tax now and then pay more later
Owners of out-of-state real estate must also be aware of state tax withholding when selling. Most states require the seller, through escrow, to withhold a certain percentage of their proceeds. These funds are sent to the state by the title company and are considered an estimated tax payment.
We use the FIRPTA (Foreign Investment In Real Property Tax Act) form to declare the seller’s residency status. This form is used for both US residency requirements as well as the respective state.
If you do not live in the state of the sale you will need to send in a withholding tax from your proceeds. You will then need to file a state tax return to reconcile the tax either receiving a portion as a refund or owing additional tax if you had capital gains.Owners of out-of-state real estate must also be aware of state tax withholding when selling. Click To Tweet
In California, a non-resident must withhold three and one-third percent of the gross sales price. After filing your tax return you will probably end up owing more if you had a capital gain. California has some of the highest taxes so you will need to make up the difference:
- 12.3 percent for individuals and non-California partnerships
- 8.84 percent for corporations
- 10.84 percent for banks and financial corporations
- 13.8 percent for S corporations
- 15.8 percent for financial S corporations
Photo: Group of Miners, Collection by Cole Townsend, New Old Stock