California Exit Tax on Real Estate: Withholding, Rates, and Exemptions

California’s so-called exit tax on real estate isn’t actually an exit tax. When you sell California real property, the state requires 3⅓% of the sales price to be withheld at closing and sent to the Franchise Tax Board as a prepayment against the income tax you’ll owe on the gain. If the withholding exceeds your actual tax liability, you get the difference back when you file a California return. The rule applies whether you’re leaving the state or not.

Why It’s Called an Exit Tax

The nickname stuck because the withholding hits nonresidents hardest, and because losing a chunk of your sale proceeds on the way out of California feels like a departure penalty. It isn’t. The withheld amount is a credit against your California income tax, no different in concept from the taxes withheld from a paycheck. Plenty of transactions that have nothing to do with moving trigger it, and California residents can get caught too if they don’t certify an exemption before escrow closes.

You may have seen headlines about proposed California wealth taxes that would follow former residents for years after they leave. Those proposals have not become law. The only “exit tax” that actually exists on California real estate is the withholding described here.

Who Gets Withheld From

The requirement reaches almost every kind of seller: individuals, trusts, estates, corporations, partnerships, and LLCs disposing of California real property.¹ Nonresidents are the main target, but California residents are pulled in too unless they submit FTB Form 593 before closing to certify their exemption status.

The legal obligation to withhold sits with the buyer. In practice, the escrow officer runs the calculation, holds back the funds, and remits them to the Franchise Tax Board as a routine part of closing. Buyers rarely touch it directly.

Exemptions You Can Claim on Form 593

Several exemptions can eliminate withholding entirely, but you have to claim them in writing on Form 593 before escrow closes. Miss that deadline and the escrow company must withhold the full amount regardless of whether you would have qualified.¹

The exemptions sellers use most often:

Principal residence. You owned and lived in the property as your main home for at least two of the five years before the sale, qualifying under IRC Section 121. That section also lets you exclude up to $250,000 of gain from federal tax, or $500,000 for married couples filing jointly.²
Last used as principal residence. Even if you no longer live there, the property qualifies if it was the last home you actually occupied. A vacation home or rental you never lived in doesn’t count.³
Loss or zero gain. If your adjusted basis equals or exceeds the sales price, no tax is owed and no withholding is required. You have to complete the gain calculation in Part VI of Form 593 to certify this.³
Sales price of $100,000 or less.¹
Involuntary conversion under IRC Section 1033. The property was seized, destroyed, or condemned and you intend to acquire similar replacement property.³
Certain corporate and partnership sellers with a permanent place of business in California, plus transfers to a controlled corporation under IRC 351 or a partnership under IRC 721, and sales involving foreclosure or a bank acting as trustee.³

How Much Gets Withheld

When no exemption applies, the escrow company calculates withholding one of two ways. The choice matters, because the default method often pulls far more cash out of your sale than you’ll ultimately owe.

Standard Method: 3⅓% of the Sales Price

The default withholds 3⅓% (0.0333) of the total sales price.⁴ That’s the gross price, not the net proceeds after mortgages, liens, or closing costs. On a $900,000 sale the withholding is roughly $29,970 even if you still owe $600,000 on the loan.

The standard method is easy and requires no extra math, but it frequently overwithholds. If you bought the property for $800,000 and sold for $900,000, your actual gain is $100,000, and yet the state holds back based on the full $900,000.

Alternative Method: Based on Estimated Gain

The alternative calculation lets you base the withheld amount on your actual estimated profit. You compute the gain in Part VI of Form 593, then multiply it by the rate that fits your seller type:⁵

Individuals and trusts: 12.3%
Non-California partnerships: 12.3%
Corporations: 8.84%
Bank and financial corporations: 10.84%
S corporations: 13.8%
Financial S corporations: 15.8%

Take the same $900,000 sale with $100,000 of gain. An individual seller electing the alternative method would have $12,300 withheld instead of $29,970. The tradeoff is paperwork and risk: you certify your basis and gain on Form 593, and if you understate the gain you can face penalties on your return.

California Taxes the Gain as Ordinary Income

One thing catches many sellers off guard. California does not offer a reduced rate for capital gains. All capital gains are taxed as ordinary income at the state’s full progressive rates, which top out at 13.3% for income above $1 million (including a 1% Mental Health Services Tax surcharge).⁶ The federal government offers preferential long-term capital gains rates of 0%, 15%, or 20%, but California doesn’t follow suit.

For a nonresident with a large gain, the combined federal and California bill can be substantial. The 3⅓% withholding only prepays the California portion. Federal capital gains tax is separate and reported on your federal return.

1031 Exchanges and Installment Sales

Two common structures have their own withholding rules, and both trip up sellers who assume they’re fully exempt.

Like-Kind Exchanges Under IRC Section 1031

In a deferred like-kind exchange, the qualified intermediary holding the proceeds carries the withholding obligation. If the exchange qualifies and the seller certifies the exemption on Form 593 (checking box 10 in Part IV), no withholding is required. If the exchange falls through, the intermediary must withhold 3⅓% of the total sales price, or the alternative amount if the seller elects it.⁷

Even in a successful exchange, boot triggers withholding. If the seller receives cash or non-like-kind property above $1,500, the intermediary must withhold 3⅓% of the boot exceeding that threshold, unless the seller elects the alternative calculation.⁷ Sellers often assume the 1031 exemption covers the whole transaction. Any boot pulls part of it back into withholding.

Installment Sales

When the seller finances part of the sale through a promissory note, withholding is spread across payments. The escrow company withholds 3⅓% of the down payment at closing. After that, the buyer becomes responsible for withholding on the principal portion of each subsequent installment.⁸ Interest isn’t subject to withholding.

The buyer submits each payment with Form 593-V and a completed Form 593 by the 20th of the month following the payment. On the last one, the buyer writes “Final Installment Payment” at the bottom of Form 593.⁸ Buyers should understand this ongoing obligation before agreeing to seller financing on California property.

Penalties for Getting It Wrong

California enforces the withholding rules against every party in the transaction.

A buyer who has been notified of the requirement and fails to withhold faces a penalty of the greater of $500 or 10% of the amount that should have been withheld.⁹
An escrow company that fails to notify the buyer of the requirement faces the same penalty, the greater of $500 or 10% of the required withholding.⁹
A seller who knowingly certifies a false exemption on Form 593 faces $1,000 or 20% of the required withholding, whichever is greater.⁹

Buyers and escrow companies can avoid penalties by showing reasonable cause. Sellers who deliberately lie on Form 593 don’t get that defense.

Getting Your Money Back

The withheld amount shows up as a tax credit when you file your California return for the year the sale closed, much like employer withholding on a W-2. Nonresidents and part-year residents file Form 540NR to report California-source income and claim the credit.¹⁰ California residents file Form 540.

On that return you report the actual capital gain, calculate your tax at California’s ordinary income rates, and apply the withheld amount as a payment. If the withholding exceeded your liability, which is common under the standard 3⅓% method, the FTB issues a refund for the difference. If it fell short, you pay the balance. Either way, the withholding is a prepayment, not a permanent loss, and the FTB won’t send back an overpayment until you file the return, even if you’ve already moved to another state.

1
Cornell Law Institute. California Code of Regulations Title 18 18662-3 – Real Estate Withholding
2
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
3
Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
4
Franchise Tax Board. 2025 Instructions for Form 593 Real Estate Withholding Statement
5
Franchise Tax Board. 2025 Form 593 Real Estate Withholding Statement
6
Franchise Tax Board. Capital Gains and Losses
7
Franchise Tax Board. Qualified Intermediary
8
Franchise Tax Board. Real Estate Installment Sales
9
Cornell Law Institute. California Code of Regulations Title 18 18662-8 – Reporting and Remitting
10
Franchise Tax Board. 2025 540NR Booklet