One of the most annoying things about any government, but for some reason more so at the state and local level, is the inability of various agencies to work together. A prime example of this has just arisen with regard to California rental property owned by out of state holders. A newly enforced rule of the California Franchise Tax Board mandates that parties managing properties for these out of staters must withhold 7 percent of the income relating to the property. This is not an unreasonable rule, since these non-California taxpayers might otherwise avoid pay the income taxes rightly owed to California. But gumming things up is a requirement of the California Department of Real Estate, which prohibits payment of the 7 percent withholding amount over to the FTB if the property owner does not consent. So if Paul in Paducah owns rental property in Petaluma which is managed by Perry, a California real estate licensee, and does not consent to the 7% withholding, what are Perry's options? Option 1 is to withhold the tax anyway and pay it to the FTB, in which case the California Department of Real Estate will suspend Perry's real estate license. Option 2 is to not pay the tax, in which case the California FTB will hold Perry personally liable for the tax that he should have withheld. Talk about being between a rock and a hard place.
So what do the different California agencies say about this? Basically, it's "we don't care about any other agency, we just want our rules enforced." However, one spokesman did have a bit of practical advice. He told real estate managers not to manage any properties for which owner withholding consents are not received.