California
This information was sourced from Chicago Title and slightly altered. The Kiersten Ligeti & Patricia Karoubi Team at The Agency Los Altos provides this information as a guide and strongly recommends that both sellers and buyers seek advice from their legal and tax counsels. Below are the key topics related to taxes in escrow:
The IRS offers free publications on tax aspects of real estate transactions:
Access these resources at https://www.irs.gov/forms-instructions by entering the publication number in the search box.
Under the Tax Reform Act of 1986, sellers must report specific details about real property sales, including homes, townhouses, condominiums, and more. The escrow officer will request the seller to complete a Certificate for Information Reporting (Form 1099-S). Sellers must provide:
Settlement agents often submit this information electronically to the IRS, with a copy included in the seller's closing documents.
California requires sellers to prepay state taxes by withholding a percentage of sale proceeds. Key points:
The escrow holder provides forms to determine exemptions and assists with compliance.
For foreign sellers, FIRPTA requires buyers to withhold 15% of the sales price. Exceptions apply for:
When ownership changes, a Preliminary Change of Ownership Report (PCOR) must be filed to update local tax records. The escrow officer typically assists in completing and filing this document. Failure to file can result in penalties.
Transfer Tax, also referred to as Real Property Transfer Tax, is a fee collected by the County Recorder whenever an interest in real property is transferred. This tax is paid at the time of recording and is calculated based on the actual sales price. The rate, determined by state or county legislation, is typically applied per $500 or $1,000 of the sales price. While the seller traditionally pays this tax, in some regions, it is customary for the buyer and seller to share the expense.
Additionally, many cities impose their own transfer taxes. In some counties, these municipal taxes are collected by the County Recorder alongside the county transfer tax, whereas in other areas, a separate payment is required directly to the city. Your escrow officer will have detailed knowledge of the applicable taxes and will ensure the appropriate payments are processed.
Homeowners are required to pay property taxes to the designated assessment, collection, or franchise tax department in their county. Changes in property ownership or the completion of new construction may lead to a reassessment of the property's value, potentially triggering a supplemental property tax bill. Taxes must be paid by specific due dates; if not, they become delinquent and may incur penalties.
The annual "tax calendar" differs by state. Beyond standard property taxes, many jurisdictions include special assessment districts created to fund infrastructure projects. Bonds issued to finance these projects require property owners to continue paying the principal and interest over time. These bond obligations vary in size and duration. Additionally, other city or county districts may impose assessments for purposes such as streetlights, traffic signals, road maintenance, or educational initiatives.
Disclaimer: This informational purposes only and is not or may not be construed as legal advise. Please consult with a tax attorney or CPA to embark upon any specific course of action. The Kiersten Ligeti & Patricia Karoubi Team at The Agency Los Altos makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions.
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