Many real estate investors are not aware they are required to withhold a percentage of the gross income collected from tenants of their rental properties if the landlord is considered a non-resident by the state.

(Title 18  of the California Code of Regulations (CCR) section 18662-1(a)(1)) states persons having the control, receipt, custody, disposal, or payment of items of income, commonly termed “withhold at source” must withhold 7% of all rents collected if the sum exceeds $1,500 in a calendar year.

The Franchise Tax Board considers a  property manager the withholding agent for California withholding purposes. The property manager is required to send a withholding tax statement (Form 592-B),  to the nonresident property owner by January 31 of the following calendar year. The form shows the nonresident property owner with property owned in the state the total amount withheld and reported.

If a property manager collects $10,000.00 a month each month from January through March, the sum of $2,100.00 would need to be forwarded to the FTB no later than April 15th. Property managers should incorporate the withholding sum into their accounting or software systems as a category under account debit and hold the funds each month. The owner’s statement should reflect the withholding amounts that will be held in the broker’s trust account of record.

Property managers are  liable for the amount that was required to be withheld including penalties and interest, unless it is proven that the failure to withhold was due to what the FTB considers ‘reasonable’ cause.

Rental property owners considered residents of the state may still need file form 590 certifying an exemption from withholding.

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