Property Managers and California Mandatory Withholding

At a glance

• Main takeaway: California expanded the tax withholding requirement on income paid to nonresident property owners to include residential real estate rentals.
• Impact on your business: Residential property managers who fail to comply with the new tax withholding requirements could face potential costly fees and penalties.
• Next steps: Aprio’s Real Estate practice can help you assess your tax withholding requirements in California.

Schedule a consultation with Aprio today

The full story:

Since 2010, California law has required tax withholding on commercial rental income paid to nonresident property owners, however, California has recently expanded the withholding requirement to include residential real estate rentals. 

To enforce the California withholding mandate, the law obligates property managers who provide property management services, such as renting, leasing, or collecting rents on behalf of nonresident California property owners as withholding agents for the state.  

As a withholding agent, property managers are required to withhold 7% of the gross rent or lease payments, less the property manager’s fee, if the total rent paid to a California nonresident exceeds $1,500 per calendar year. Failure to withhold and remit the withholding to the Franchise Tax Board (FTB) can result in a penalty equal to the amount required to be withheld. A nonresident owner for withholding purposes is defined as one of the following:

• Individuals who are not residents of California,
• Corporations, partnerships and LLCs that do not have a permanent place of business in California or are not registered with the California Secretary of State to do business in California and
• Any trust without a resident grantor, beneficiary, trustee, or estates where the decedent was not a California resident.

Withholding Exemptions

Property managers are not required to withhold on gross rental payments if the property owner can be classified as one of the following:

• A California resident
• A corporation, partnership or LLC qualified with the Secretary of State to do business in California or that have a permanent place of business in California
• An estate where the deceased was a California resident at the time of death
• A tax-exempt organization
• An insurance company, IRA, or qualified pension and profit-sharing plan
• A California non-grantor trust

If an owner of real property located in California qualifies under one of these exemptions, they must complete Form 590, Withholding Exemption Certificate and submit it to the property manager to certify their exemption. Upon proper certification, a property manager may make a payment of rental income to a landlord without withholding. 

Waiver or Reduced Withholding

California nonresident property owners may qualify for a waiver or reduced withholding. To request a waiver from withholding submit Form 588, Nonresident Withholding Waiver Request. To request reduced withholding submit Form 589, Nonresident Reduced Withholding Request.

FTB Form 592/592-B/ Form 592-PTE

Property managers must report withholdings quarterly to the FTB using FTB Form 592, Resident and Nonresident Withholding Statement. Withholding is remitted for the payment period associated with the income earned (April 15, June 15, Sept 15 and Jan 15), along with the Form 592-V, Payment Voucher for Resident and Nonresident Withholding.

Before January 31 of the following calendar year, the withholding property manager must provide the nonresident owner with a statement showing the total amount of income subject to withholding and the total amount withheld, using a FTB Form 592-B, Nonresident Withholding Tax Statement. The Form 592-B provides cumulative withholding information for the previous year and the nonresident property owner must file it with their California income tax return to claim the withholding credit.

A property manager who fails to furnish an accurate Form 592-B to a landlord may be penalized $50 per form. If the failure is an intentional disregard for the requirement, the penalty is the greater of $100 or 10% of the amount required to be reported. Penalties may also be assessed if the form is late.

The bottom line

Complying with the newly expanded and mandated California tax withholding requirement can be complex. Aprio’s Real Estate practice has extensive experience helping property managers and real estate investors and can guide you through your tax obligations to avoid costly penalties.

Schedule a consultation with Aprio’s Real Estate practice today.