California Grabbing Every Penny It Can Find

Most folks living on this side of the state line, who also work in California or have varying forms of other California source income have become used to the state’s nasty habit of wanting its dough up front, protecting itself from that rare bloke who may not see fit to file a California nonresident tax return, and pay tax on the money earned there.

And specifically, folks residing in Nevada while owning real estate located in California may also have bumped into this situation.  Say a Nevada resident owns such property which is managed  (perhaps by a pro, or even by merely a friend or relative) on his behalf.  Generally speaking, the property manager is required to withhold California tax from the net rental proceeds before remitting them to his Nevada boss.  And according to recent commentary in the Spidell’s California Taxletter, it doesn’t matter if the property manager is professionally licensed in any way, or if the manager simply resides on the premises and merely provides services to the owner in exchange for free rent (unless the manager living on the premises is an “employee” of the owner).

There are circumstances in which the property owner may request a waiver of withholding from the Franchise Tax Board.  They include, among others, owners who make timely estimated tax payments, and who are considered current on any outstanding tax obligations with FTB – get California Form 588 for more information.  And even if a property owner doesn’t qualify for a complete waiver, he may qualify for reduction of the standard 7% withholding amount in some circumstances – California Form 589 would be the ticket here.

And the recent decision by the California Board of Equalization in the Appeal of Sara K. Crossett reminds us that California’s rules may be the most self-serving of all when it comes to the taxation of certain folks whose state of residence changes during the pendency of an income earning transaction.

Our lady was a resident of Washington state in 2004, the year in which she contracted to sell a business.  She later moved to California and subsequently started to receive payments from the sale.  She properly reported the gain on her Federal return when the money started to roll in, but for state purposes, treated the gain as sourced to Washington – the place where she lived when the sale actually occurred, fixing her right to receive the dough.

Not good enough for California, of course, whose law says that one’s gross income is reportable “in the year received,” regardless of the fact that the legal right to receive that income may have arisen in a prior year during which the taxpayer resided elsewhere.

Gotcha.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes/.

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