John M. Lee: New Real Estate Laws for 2003

Several real estate laws passed this year will go into effect at the beginning of 2003. These will potentially impact all buyers, sellers, renters and landlords.

Tax Withholding
Currently, the withholding laws only apply to non-resident aliens whereupon the sale of a property, the escrow company has to withhold 10 percent of the sales price and forward it to the IRS, and if a non-California resident, 3.33 percent to the Franchise Tax Board (FTB).
Starting in 2003, the California withholding law expands to cover all individuals, including residents and non-residents of California. The penalty for not complying is the greater of $500 or 10 percent of the withholding amount.
There are several exceptions, however. Withholding is not required if the property is a principal residence; the total sales price is under $100,000; the sale results in a taxable loss; the sale is the first phase of a 1031 tax-deferred exchange; and involuntary conversions such as a foreclosure.
Corporations, partnerships and tax-exempt sellers are excluded from the law. The current law allows the seller to apply for a waiver or a reduction of withholding if the seller can substantiate a lower amount.
Under the new law, the FTB will not grant a waiver or reduce the rate of withholding for sales with a small taxable gain. Thus, sellers will have to pay their withholding taxes at the time of the sale and then claim the differences back when they file their annual state income taxes.
Most foreigners are surprised by the current rule when closing on a piece of property and I believe that the new law will unpleasantly surprise many sellers next year.

60-Day Termination Notice
Effective Jan. 1, 2003, a landlord must provide a month-to-month tenant with an additional 30 days notice before terminating the tenancy if the tenant has lived in the property for one year or more, making the notice requirement a total of 60 days, instead of 30 days.
This will apply to owner move-in evictions in rent-controlled properties in San Francisco. The intent is to accommodate tenants who may need more time to make new housing arrangements.
The only exceptions are if the lease is for a fixed term, such as a one-year lease agreement, and if the tenant has not been living in the premises for more than one year. In that case, a 30-day notice is legally sufficient. However, if a tenant wishes to terminate the tenancy, the 30-day notice to the landlord is still adequate.

Landlord's Entry
Effective 2003, landlords entering a tenant's unit must give the tenant reasonable notice in writing of the landlord's intent to enter.
Entry must be during normal business hours, unless the tenant otherwise consents to an alternative time. The written notice and business hours requirements do not apply to cases of emergency or when a tenant has abandoned or surrendered the premises.
There is an exception to the written notice requirement when an owner is selling the property. The notice of entry may be given orally, in person or by telephone, if all the following conditions are met: The purpose of entry is to show the dwelling to prospective or actual purchasers; the landlord or landlord's agent has notified the tenant in writing within 120 days of the oral notice to show to prospective or actual purchasers; and at the time of entry, the landlord or agent leaves written evidence, such as a business card, of their presence inside the unit.

Interest for Security Deposits
From Sept. 1, 1983 through August 3, 2002, owners of properties in San Francisco holding security deposits have been required to pay five percent simple interest each year on any deposit held for at least one year.
That five percent interest was based on the rate owners were getting on regular passbook savings in 1983. Since then, interest rates have gone through several gyrations to where the current passbook savings rate is about one percent. The interest rate for security deposits was changed in August of this year and now it will be based on the average of the 12 monthly "Discount Window" rates as posted by the Federal Reserve Bank. It will be calculated and announced by the Rent Board the first week of each January.
The varying rate will be in effect from March through February of each year. The rate for this year is 3.4 percent, effective from August 4, 2002 through Feb. 28, 2003. For interest on deposits spanning over the two periods, calculations will have to be done at five percent before August 3 and 3.4 percent after August 4.
As you can see, real estate laws change all the time and it is prudent to stay abreast of any new developments. It's been a great year in real estate, making it the industry that has supported our economy through the current recession.
I want to wish everyone a great upcoming holiday season and a prosperous 2003.

John M. Lee is one of the top selling brokers at Pacific Union specializing in the Richmond and Sunset districts. If you have questions regarding real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.