Have client who lives in another state selling rental condo in SC as 1031 exchange and will purchase another in SC to replace. No fed tax will be due, but settlement attorney sent form for gain calculation due to SC non-resident withholding requirement at closing. However, SC tax return starts with federal taxable income, and I can see nothing that states adding back the cap gains in the event of a 1031. SC also says it conforms generally to fed law with a few exceptions. 1031 is not mentioned as one of these. Must the client pay est tax on this at closing just to get it back when he files? It will be around $9,000. (Line 41 net cap gains deduction adj will not apply since there won't be any cap gain on 1040.)
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No design to ascertain taxes
Burke, I don't believe state withholding requirements on the sale of real estate is to definitize the amount of tax due, or even discern whether ANY tax is due or not.
The requirements are to assure that the transaction gets reported, improve cash flow for the state, and also give the state the extra bargaining position which arises from simply holding the money (deserved or not).
In your example, suppose the S C taxation on this transaction is only $3000, meaning your client would have a $6000 refund. Just think of the difference it makes to SC. They are now in the position to assure the transaction gets reported (if not, there's no refund), plus they get the use of the $9000 for several months, PLUS they can bicker around about giving the $6000 back if they can find a reason or excuse.
Compare this to their position if the withholding is not necessary. Firstly, they may have to spend gobs of money just chasing down the seller who doesn't report. Then gobs of money trying to collect the $3000 that they do owe. They cannot levy from an out-of-state bank, they have to get a court ruling, etc.
Not saying this is fair, but you have to understand the thought process with taxing authorities. More and more states are doing this, I believe Illinois might be the most recent.Last edited by Nashville; 11-04-2008, 05:39 PM. -
The problem here
is the 9k will become taxable since your client is in effect receiving cash.Comment
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Burke:
Take a look at page 11 of this link.
I skimmed over it because I'm in a hurry right now, but I think it addresses your question.
"The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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SC Withholding
I would fill out the form showing no taxable gain therefore no withholding. Settlement attorney needs filled out form for his records.Originally posted by Burke View PostComment
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Just file NR SC return
It appears SC is seeing a "sale" (with mandatory withholding of some % of the proceeds) and not the (later?) 1031 exchange.
My limited understanding of SC forms is that you fill in as a "tax payment" on the line of SC 1040 marked "NR Sale of Real Estate" the amount of tax withheld, and supported by Form I-290 which should have been part of the documents received at the time of closing.
You probably will have to endure the hassle of filing a non-resident SC tax return (still SC 1040 with appropriate box at top checked), employing the Sch NR which should have appropriate zeros for all SC "income." (The SC return starts with federal taxable income.)
Other than being a wash on the federal return (state taxes paid and same state taxes refunded) that should not be much of an overall complication.
Here is the Form I-290 to help you:
FEComment
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There wil be
$9,000 income (boot) on the South Carolina return and the federal return.Comment
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IS there boot??
...but Burke stated in the original post: "there won't be any cap gain on 1040"Originally posted by veritas View Post
I agree IF there is boot income....maybe I misread the post?
My understanding is there was a property sale, with SC withholding, and a later/separate purchase within the 1031 guidelines.
FEComment
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State Taxes
Burke, this was really a brilliant comment. No knowledge whatsoever of S C taxes, and the special form which is used to reduce withholding. Also pre-supposes that you didn't know anything about why states withhold.Originally posted by Nashville View Post
Shows you how deviant a thought process can be if trying to answer a question about state taxes when you know very little about that state.
Apologies, Snag (Nashville)Comment
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That does it. One of the items exempt from withholding are 1031's, as long as the replacement property is identified at the time of sale. I have advised her to make sure this is done, or to postpone the closing to make sure she meets the rules. THANKS!Originally posted by JohnH View Post
PS: I checked SCDOR and couldn't find anything, hence the post.Last edited by Burke; 11-05-2008, 04:01 PM.Comment
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Their web site is OK overall, but not as user friendly as it should be. Sometimes info is hard to find. Glad I could help out."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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I read it differently
I did not see "property identified". It says "simutaneous" exchange.Originally posted by Burke View Post
If not simutaneous there are two other options
Option 2 looks like the most likely way to goComment
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Yes, I talked with her, mailed her the affadavit, and also sent her the link to look at, download and refer the appropriate info to the attorney. They have their own QI company which she is using. I feel sure they know all this since they are located in SC. I would certainly hope so, but you never know. She was dealing with someone in the attorney's office who was asking for the withholding form and gain figures. Question 3 on page 5 of the advisory bulleting stated "tax must be withheld where a replacement property has not been identified at the time of sale." I saw the two options on a later page. Definitely want Opt 2.Comment
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