California Form 593 Real Estate Withholding Tax Statement - Military Exemption

[LN16]

Hello,

We're selling our house and need assistance completing the California Form 593 Real Estate Withholding Tax Statement form. Escrow informed us most people typically select #1 or #2 under Part III of the Certifications to exempt the sale from withholding. 

1. The property qualifies as the seller's (or decedent's, if sold by the decedent's estate or trust) principal residence under Internal Revenue Code (IRS) Section 121.
2. The seller (or decedent, if sold by the decedent's estate or trust) last used the property as the seller's (decedent's) principal residence under IRC 121 without regard to the two-year time period.

Background: My husband has been on active duty in the military since 2007. Since CA is not our domicile, we filed nonresident tax returns in California when stationed here (2015 and now 2024). I work remotely for a company in CA. We lived in our home from 2015 (when it was purchased) - 2021. My husband received orders to PCS (Permanent Change of Station) to the East Coast between 2021 - 2024, so we rented the house until we decided to sell just recently upon moving back to CA. We did not move back into the house and are staying at a hotel. We've also received approval waivers for 588 Nonresident Withholding Waiver Request for each year we rented the home while away.

Are we still eligible for the exemption even though we rented out the house? If so, would we select #1 above?

[TomD8]

For military personnel, CA law allows the normal 5-year residence requirement for the capital gain exclusion to be suspended for up to ten years.  This applies when the duty station is at least 50 miles from the residence - or while the person is residing under orders in government housing - for a period of more than 90 days or for an indefinite period.  See Exclusion of Gain on Sale of a Principal Residence on page 4 of this CA tax publication:

https://www.ftb.ca.gov/forms/2023/2023-1032-publication.pdf

Since you lived in the home as your primary residence from 2015 to 2021, which is well within the framework allowed, it appears that you do qualify for the exemption, assuming you also meet the "50-mile" or "government housing qualification".  The fact that you rented out the house for a period of time does not disqualify you as long as you otherwise meet the adjusted-for-military "principal residence" requirement.