Sold Inherited Home in California - RE: CA State Return and Franchise Tax

[Lonestar]

Picking up where I left off on previous post on how to calculate our gain on an inherited house we sold in CA... 
When the sale was culminated, money was put in escrow (I assume) for CA State Franchise Tax. I was told at some point I may get some of that back. I think since I'm a non-resident I will not get a full refund, as it IS a capital gain and IS over $250K.

At any rate.. 1) Please confirm I'm obligated to fill out a CA state tax return. I assume so, especially in light of ---> 2) the only entry I'm aware of at the moment is the capital gain on the sale of the house. It pulls the gain value from the my Federal return and shows a refund of about 66% of the original 3.3% that was pulled out at the sale. This is good news, if it holds up. Does it sound plausible?

Thoughts? Questions?

Thanks in advance! 

[DaveF1006]

Yes to question 1. You need to file a California non-resident return to report the sale of the inherited house. Question 2 is confusing to me though when you mention  "shows a refund of about 66% of the original 3.3% that was pulled out at the sale". 

To determine the capital gains on the house and if this house was never your personal residence, you would use the Fair Market Value (FMV) at the time of the decedents death. Then you would compare the sale of the house with the FMV by substracting the FMV from the proceeds. If the result is positive, you will pay capital gains on the gain. If negative, you will not pay capital gains but you cannot declare a capital loss either.

Normally, if the death is recent, the FMV and proceeds are nearly identical and the capital gains are minimal at best. You also mention a $250,000. Normally, this dollar amount is only considered if you are reporting capital gains on a personal residence if you own and have lived in your home for two of the last five years. 

[Lonestar]

Thanks! Yea, I knew when I wrote the 66% blah blah it would be confusing... what I mean is, say they took $10,000 at the time of the sale for CA Franchise Tax. When I do the CA return in TurboTax, it shows me getting most of that back, like $7,000. I'd like to assume TurboTax is correct, since it's pulling the sale data from my Fed return, but I'd like understand the why. I'm assuming they 'estimated' high. (?)

[KrisD15]

California does not tax an inheritance. 

The Federal government does not tax an inheritance. 

ONLY Capital Gain would be taxed. 

Your first post indicated that you had over 250,000 in Capital gain. 

If that is true, 3,000 tax on a 250,000 capital gain is only .012% which seems pretty low considering California taxes Capital Gain at the regular Income tax rate. 

Your Capital gain is the selling price less the Fair Market Value on the date you inherited it (less improvements and selling fees) 

If you ever held it as a rental, you need to recapture depreciation. 

CA link

[Lonestar]

Thanks Kris. Let me try once again to clarify, using numbers that make more sense.

Non-CA resident wife, was made JT on aunt's CA home back in 2006. (My sincere apologies... I didn't think about including this JT info in first post. Just realized that. It was all in another post about figuring the cost basis formula.)
Aunt passed in 2021. Wife sold house less than 6 months later.
In the Seller's Agreement, say $30,000 was withheld for CA Withholding Tax by the Franchise Tax Board.

Properly figured wife's cost basis with help from Community on formula.

Filling out CA tax form 540NR (may not be what I need...??) in TurboTax, after having entered home sale information in Federal portion, seems to indicate she will get refund of $20,000.

Trusting the cost basis was done correctly on Federal return and TurboTax doesn't make mistakes, it seems the original amount withheld was over estimated, probably based on full sale price vs cost basis adjusted net of sale... or some other value. That is what I'd like to be more clear on, assuming the refund is correct.

This is not an inheritance tax, as I understand it, but a capital gain on my wife's portion of the sale of a house held in joint tenancy where the other JT has passed.

I hope that's clear enough. I'm just looking to see if it's feasible that she should be getting that refund. 

I had a CA CPA we used last year for the aunt's return, indicate that any 'Franchise Tax' would be refunded but I don't know if this is considered a Franchise Tax per se. And if so, I don't think my wife is exempt because she is a non-resident selling a second home, although we never lived in the home... but she has been JT for 15 years prior to selling.   Sorry, I may be dwelling too much on the Franchise Tax thing, which may not be relevant I have no idea! LOL

I'll stop there.

[ColeenD3]

Yes, as nonresidents, you will file the 540NR. It is unlikely that the amount of withholding would be spot-on. It could have been understated or overstated.

The Franchise Tax Board is the name the state gives their Dept. of Revenue. While there is a Franchise Tax, it is related to businesses, not the sale of a home. The FTB more than likely withheld state income tax on the sale.

Franchise Tax

[Lonestar]

OK, so... Getting further along in doing my CA state return. As mentioned originally above, the first probably in complete pass, it was showing that we may get back 2/3 of what was held out by the Franchise Board a the closing of the home sale.

Fast forward to now, after entering as much info as I can, it's now showing a refund of 100% of what was originally held out!

I'm looking at the 540 NR form, going line by line, and all I can say is, I don't see anything amiss. Not that I understand it that well. (seems California-complicated to me.)  At any rate, by the time it gets down to line 103, it shows we overpaid by the full amount held out for Franchise tax. 

If anyone might suggest this is normal, I'd be glad to hear it. I had a CA CPA, in passing, tell me that the tax would be refunded, but I didn't believe it (LOL) and I haven't pigeonholed him yet to ask why. 
Otherwise, what might I look for in the state return that could cause a miscalculation that presents this kind of result (like a full refund)?

Thanks in advance.

[DMarkM1]

CA withheld taxes on the sale based on the entire sales proceeds amount.  CA would not know the net amount because they don't know the basis which was stepped up due to the inheritance aspect.  When you entered the information on the sale you entered the basis.  It is likely the entire withheld amount would be refunded.  

[Lonestar]

Thanks Mark, I guess what's weird is that we don't meet any of the Exceptions to not have to pay and there are definitely proceeds. I will be looking to see that I am answering all the Fed and State questions correctly. I found another article in TT help that shows to indicate the taxes as Other Withholding vs Income Tax, which is what I have done so far. I guess I'll see. I'm sure we will owe something.