How to Avoid Real Estate Withholding Mistakes When Selling Property Through a Trust in California

When selling California real estate, the buyer is usually required to withhold a portion of the sale proceeds for state taxes. This applies whether the seller is a California resident, a non-resident, or even a trust.

The standard withholding rate is 3 1/3% of the gross sales price, unless the seller elects to use an alternative rate based on the actual gain. While this seems straightforward, mistakes often happen—especially when the property is owned by a trust.

As a CPA for real estate clients in Los Angeles, we often see costly errors with real estate withholding forms. Here’s what you need to know to avoid problems.

1. Selling Through a Grantor Trust (When the Grantor is Alive)

If the property is owned by a grantor trust and the grantor (the original owner) is still living:

• The withholding forms should use the grantor’s name and Social Security Number (or ITIN).
• Do not use the trust’s name or the trustee’s information.
• The grantor will report the income from the sale on their individual California tax return and claim the withholding credit there.

Example:
A retired teacher sells a Los Angeles condo through her family trust. Since she is alive, the buyer must enter her name and SSN on Form 593—not the trust’s. She will later claim the withholding on her personal tax return.

2. Selling Through a Non-Grantor (Irrevocable) Trust

If the grantor has passed away, the trust becomes an irrevocable (non-grantor) trust. In this case:

• The withholding form should list the trust’s name and Federal Employer Identification Number (FEIN).
• Do not enter the decedent’s name or the trustee’s information.
• If the trust doesn’t yet have an FEIN, leave the ID field blank for now and notify the Franchise Tax Board (FTB) once the FEIN is issued.

Example:
A film producer’s living trust becomes irrevocable after his passing. When his Brentwood home is sold, the buyer must list the trust’s name and FEIN on Form 593—not the producer’s or trustee’s personal details.

3. Passing Withholding Through to Beneficiaries

If the irrevocable trust distributes the sales income to beneficiaries (children, heirs, etc.), the trust must also pass through the withholding credit:

• The trust files FTB Form 592 (Resident and Nonresident Withholding Statement).
• Beneficiaries each receive Form 592-B, showing their share of withholding.
• The credit is allocated properly so beneficiaries can claim it on their own returns.

⚠️ If the trust fails to do this, the Franchise Tax Board will apply the credit only to the trust, not to the beneficiaries—causing the beneficiaries’ tax returns to be flagged or denied credits.

Why This Matters

Withholding mistakes can delay refunds, create unnecessary tax notices, and even result in penalties. California is very strict about proper reporting on Form 593 (Real Estate Withholding Statement) and related trust filings.

Working with an experienced CPA for real estate transactions in Los Angeles helps avoid these issues. At Velin & Associates, Inc., we regularly assist clients—homeowners, investors, and trusts—with property sales and withholding compliance.

📞 Need help with real estate withholding or trust tax reporting?
Contact Velin & Associates, Inc. today.
We specialize in working with real estate owners, investors, and trusts across Los Angeles.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org