NEW LAW AFFECTS TAX ON LAND SALES.

Byline: GREGORY J. WILCOX Real Estate

Starting Jan. 1, California state government is getting into the revenue enhancement business.

It's being done under the guise of solving the cash-flow crunch that delayed passage of the state budget, which now seems to be an annual rite of summer.

The budget bill, AB 2065, signed last month by Gov. Gray Davis, contains a little-known provision that requires the buyers of income property to withhold 3.33 percent of the purchase price and turn the money over the Franchise Tax Board.

State officials estimate that this will generate about $225 million, most of it from the sale of commercial property.

The concept is not new, but in the past it only applied to out-of-state residents who cashed in on their California real estate investments.

Now California residents have to pay by the same rule.

Not surprisingly, the state's real estate industry is not happy about this.

``It's like so many other parts of the budget. It borrows from the future. It front-loads tax revenue from the next fiscal year into (this) fiscal year,'' said Mark Bogetich, spokesman for the California Land and Title Association, which opposed the provision.

The problem, Bogetich points out, is that what the state takes away in one fiscal year, it may have to give back the next.

Of course, there are some exemptions.

The new rules do not apply to the sale of a primary residence, good news for sellers of residential real estate in a market expected to remain hot next year.

Sales of $100,000 or less are exempt from the new rule, as are sales resulting in a taxable loss and like-kind exchanges. Also exempted are sales in which the seller is tax-exempt or a California corporation or partnership.

However, some of this $225 million may end up being returned to sellers, depending on how their tax situation pencils out.

``Basically, they are just collecting taxes early,'' said Olga Moretti, president of the Southland Regional Association of Realtors, which opposed the provision.

Christopher Woods, the chief consultant on the bill sponsored by Assemblywoman Jenny Oropeza, D-Carson, said that the withholding measure was necessary because Republican legislators were not about to raise taxes.

And this is not a new tax, officials point out, it's just an issue of when they are collected.

It also prevented cuts in key local programs like public safety, Woods said.

``It's a pretty modest thing. In terms of balancing all the different decisions (regarding the budget) this is one of the things we have to do,'' he said.

Nevertheless, the tax board says this is a major change with broad impacts, and financial pain can be inflicted if the law is ignored.

The penalty for not complying is a fine of $500 or 10 percent of the amount that was supposed to be withheld, whichever is greater.

State tax officials predict that 300,000 transactions will be impacted by the new law next year.

They also point out that this is a withholding just like what goes on in company payroll departments.

The tax board also said the new rule could save sellers some paper work.

``Real estate withholding will, in many cases, save the seller from having to make an estimated payment to cover the tax from the real estate sale's gain,'' the board said.