Question: If a nonresident of California owns California income property, does his broker need to withhold 7% of the income generated by the property for tax purposes?
Answer:
California Revenue and Taxation Code §18662 states that nonresidents of California must pay taxes on California income. In the case of a landlord, these taxes are to be withheld by either the landlord or his agent from the rent paid on the California property.
Further, the California Franchise Tax Board’s guidelines on the matter state:
Withholding agents are required to withhold from all payments or distributions of California source income made to a nonresident when the payments or distributions are greater than $1,500 for the calendar year unless the withholding agent receives authorization for a waiver or a reduced withholding rate from the Franchise Tax Board.
The instructions for completing Form 592-B, “Nonresident Withholding Tax Statement,” which must be filed with the Franchise Tax Board, state 7% is the standard amount of tax to be withheld from rents paid/received in California.
Question: If a financially distressed homeowner collects rent on rental property but does not make his mortgage payments, what are the consequences?
Answer:
If, within the first year of owning a property,a property owner collects rent without making mortgage payments he is committing an act of rent skimming. If the owner commits rent skimming the lender may collect all rental income and court costs. [Calif. Civil Code §891(c)]
If the owner’s rent skimming causes the property to be foreclosed, the tenant may collect his security deposit and moving expenses. If the owner was already two or more months delinquent when the tenant signed the lease, the tenant may collect at least three times the rent paid. [Calif. Civil Code §891(d)]
If, within two years of acquiring five or more properties, the property owner collects rent without making mortgage payments on at least five of those properties, he is committing multiple acts of rent skimming. Multiple acts of rent skimming is a crime in California. [CC §890(b)]
A homeowner who commits multiple acts of rent skimming may be imprisoned for up to one year, fined up to $10,000, and pay at least three times the rent collected to the lender and tenants.[CC §892]
If the homeowner does not make mortgage payments but uses the collected rental payments for medical expenses or to make necessary repairs to the rental property and the homeowner has no other funds for these expenses, the homeowner has not committed rent skimming. [CC §893]
Why the one- and two-year limits? The legislative intent of rent skimming statutes is to prevent intentional dishonest behavior, not to punish property owners who, years after purchase, come under financial duress.
Related article:
Too many unanswered questions exist regarding this law. I posted these issues in a prior rent skimming article and I’ll post them again here.
It seems the objective of the law is to force the landlord to divest himself of the rent. What if there is a 1st and 2nd TD and the total of both payments exceeds the rental income? Is it the landlord’s discretion who he pays? What if he gives it all to the 2nd? What if he pays the 2nd far greater installments than required by the note just to get rid of the rent? What if he offered it to the senior lender first? Can the 1st claw the money away from the 2nd?
The law requires payment by the landlord but fails to require the lender to accept it. Does this really mean that the landlord’s only duty is to tender payment? Once refused, must the landlord continue to tender every month for a year? Can the lender sue even after refusing to accept it?
And if a lender with a due-on-sale provision knows that title passed and subsequently accepts the payment from a subject-to buyer, does a due-on-sale waiver result? If so, this is a good reason why a lender might refuse the rent when tendered but sue for it after a Trustee’s Sale.