Tax School Practice Test 2025 - Free Tax Practice Questions and Study Guide

The statement that sellers are always exempt from withholding is false. Withholding requirements for sales of California real property indicate that sellers are generally subject to withholding at the time of the sale unless specific conditions or exemptions apply. This means that in most cases, sellers will have tax withheld from the proceeds of the sale to ensure that taxes owed on any gains from the property sale are collected as a prepayment.

The purpose of the withholding is to guard against tax evasion and ensure that the state collects taxes on any income that may arise from real estate transactions. While there are certain exemptions that can apply to specific sellers under particular circumstances, it is not accurate to claim that sellers are always exempt from these withholding requirements. This misunderstanding could lead to significant tax implications for sellers if they fail to comply with the withholding rules.

The other statements accurately reflect the nature of real estate withholding in California's tax system, clarifying that it is a prepayment of state income tax and not an additional tax burden, while also giving correct information about the withholding rate.