Today, I am talking to owners of income property in California who do not live in California. If you fall into that category, you are what we call an “out of state owner”. If you are an “out of state owner”, the California Franchise Tax Board wants your money. A couple of years ago, they decided the best way to collect that money was to force property management companies in California to withhold taxes from our clients and submit quarterly tax returns to the Franchise Tax Board, in essence pre-paying your income taxes (similar to self-employed taxpayers who make quarterly tax payments). If you hire a property management company in California, they will have to withhold seven percent of your gross rents (7% of gross rents less the management fee).
There are exemptions from this requirement, and it’s a good idea to find out if you qualify for one of them. You can get an exemption if you have paid California taxes for the last two years. Another exemption is allowed if your property does not break even or loses money. When you are applying for an exemption you will need to fill out California Franchise Tax Board Form #588.
If you live outside of California and you own rental property in San Francisco, I would love to talk to you and help explain how all of this works. We can also answer any questions you might have about property management, so please do not hesitate to contact us at Gordon Property Management.