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?
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?
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.