California Tax Board Can Stake a 3.33% Claim on Profits From Some Home Sales

Q: My wife and I are in the process of selling our home and purchasing another. We are dumbfounded by something we found in the escrow instructions. In them, it states that 3.33% of the proceeds from the sale will be withheld for payment to the California Franchise Tax Board. What is going on? This has never happened before.

--G.H.F.

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A: The state Franchise Tax Board requires escrow companies to withhold 3.33% of the proceeds from a home sale when a property is sold by out-of-state residents. The requirement can be waived upon petition to the Franchise Tax Board. If you do not live outside California, your escrow company should not withhold the funds--although it might be wise to make sure that your escrow officer realizes that this provision of law does not apply to you.

Why is this provision even a part of your escrow instructions? Several years ago, the state of California stepped up its effort to collect what it considers its fair share of the profits from real estate transactions that do not result in a reinvestment in California real estate. By its estimate, state coffers were losing millions of dollars of taxes when residents sold their California homes and moved out of state.

Previously, the state had relied on the honor system to compel former residents to repay the state its share of

profits not reinvested in a new principal residence in California. When that didn’t work, the state resorted to direct withholding on deals in which the seller lists an out-of-state address with the escrow company.

According to your escrow officer, the company routinely includes this withholding provision in all escrow instructions but only exercises it in cases involving an out-of-state seller.

Is It Better to Pay Off Condo or House Loan?

Q: I recently purchased a house, borrowing $146,500 at an interest rate of 6.75%. I also own a condominium with an outstanding mortgage of $77,000 at an interest rate of 7.625%. I plan to live in the house and rent the condo. I want to begin accelerated payments on one of the two mortgages as a form of forced savings. Which mortgage shall I pick for this? I expect to own the house for at least 15 years, while I would hope to sell the condo in a few years if the market improves.

--D.N.

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A: You didn’t say whether the condo rental is cash positive or negative. And you didn’t specify whether you are able to take a deduction if the condo is producing a loss. (You may deduct up to $25,000 in passive losses on rental property if your adjusted gross income is $100,000 or less.) But in the end, these facts may not matter, say our experts, who argue that you would be better off paying down your condo mortgage since it carries the higher interest rate of the two loans. This is simply a “more bang for your buck” analysis.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053 Or send e-mail to carla.lazzareschi@latimes.com