California Real Estate Withholding: Rates, Exemptions, and Refunds

California real estate withholding is a prepayment of state income tax collected at closing whenever California real property sells for more than $100,000. The default amount is 3⅓% of the gross sales price, paid directly to the Franchise Tax Board by the escrow officer. It is not an extra tax. It is money credited against whatever capital gains tax the seller ultimately owes, and sellers who qualify for an exemption can avoid it entirely by certifying their status on FTB Form 593 before escrow closes.¹

Who Gets Withheld On

The rule applies to any sale of California real property above $100,000, and it sweeps in almost everyone: individuals, trusts, estates, corporations, partnerships, and LLCs. It was written to make sure out-of-state sellers pay California tax on California gains, but residents are subject to it too unless an exemption applies.¹

The escrow officer or title company handling the closing is the one who notifies the buyer, collects the funds, and sends everything to the FTB. Sellers don’t remit the money themselves. What sellers do is fill out Form 593 to tell the escrow officer which category they fall into.

The 3⅓% Default Rate

If no exemption or alternative calculation is elected, withholding is 3⅓% of the total sales price. Not 3⅓% of the profit. On a $600,000 sale, that’s $19,980 pulled out at closing and sent to Sacramento, whether the seller made money on the deal or not.¹

Because the rate applies to gross price rather than gain, sellers with small gains or losses end up with far more withheld than they actually owe. That gap is why the exemption and alternative-calculation options matter.

Exemptions That Eliminate Withholding

A seller who fits one of the exemption categories can avoid withholding altogether by certifying that fact on Form 593 under penalty of perjury. The signed form has to be in the escrow officer’s hands before closing. Turning it in after the fact doesn’t work.

The exemptions most sellers rely on:

Principal residence. The property qualifies as the seller’s main home under Internal Revenue Code Section 121, meaning the seller owned and lived in it for at least two of the five years before the sale.²
Last used as principal residence. Withholding is waived when the property was last used as the seller’s principal residence, even if the two-out-of-five rule isn’t met.
Loss or zero gain. The seller’s adjusted basis equals or exceeds the amount realized. Part VI of Form 593 has to be completed showing no gain.
Involuntary conversion. The property was seized, condemned, or destroyed, and the seller intends to acquire replacement property under IRC Section 1033.
Nonrecognition transfer. The transfer qualifies for nonrecognition under IRC Section 351 or IRC Section 721.
California entity. The seller is a corporation organized in California (or qualified to do intrastate business), or a California partnership or LLC.
Tax-exempt entity. The seller is a tax-exempt organization.

Most exemption claims come down to the first two. If you’re selling your home and you’ve lived there for at least two of the past five years, withholding simply does not apply once you certify that on Form 593.³

Certifying an exemption you don’t actually qualify for is expensive. A false exemption certificate carries a penalty of the greater of $1,000 or 20% of the required withholding, plus you still owe the tax.⁴

The Alternative Calculation for Small Gains

Sellers who don’t qualify for a full exemption but expect their actual tax to fall below the 3⅓% figure can elect an alternative method on Form 593. Instead of applying 3⅓% to the sales price, the alternative applies the seller’s maximum tax rate to the estimated gain, which Form 593 calculates as sales price minus adjusted basis and selling expenses.³

The rate depends on the seller type:

Individuals and trusts: 12.3% of estimated gain
Corporations: 8.84% of estimated gain
S corporations: 13.8% of estimated gain
Banks and financial corporations: 10.84% of estimated gain
Financial S corporations: 15.8% of estimated gain

The difference can be significant. Say you sell a rental for $800,000 that you bought for $600,000, with $40,000 in selling expenses. Estimated gain is $160,000. The alternative withholding at 12.3% comes to $19,680, compared with $26,640 under the standard 3⅓% method. The smaller the gain relative to the sales price, the bigger the gap.³

1031 Exchanges

Sellers rolling into replacement property through a 1031 like-kind exchange get special treatment. For a simultaneous exchange, or a deferred exchange where the proceeds go to a qualified intermediary, no withholding is required on the main transfer. If the seller receives any cash, excess debt relief, or non-like-kind property (collectively called boot) over $1,500, withholding applies to that boot at 3⅓%, or at the alternative rate if elected.⁵

If the exchange falls apart because replacement property isn’t identified within 45 days, the closing doesn’t happen within 180 days, or the transaction otherwise fails IRC Section 1031, the intermediary must withhold 3⅓% of the full sales price and notify the FTB within 10 days of the deadline expiring.¹

Installment Sales

Installment sales don’t finish the withholding at closing. The buyer withholds 3⅓% of the down payment during escrow, then keeps withholding 3⅓% of the principal portion of every future installment payment. Interest is not subject to withholding.⁶

The seller can ask the FTB to approve an election out of the ongoing installment withholding, and the FTB has 30 days to act on the request.³

Foreign Sellers: A Second Layer of Federal Withholding

The California 3⅓% is separate from federal FIRPTA withholding, which hits foreign sellers of U.S. real property. FIRPTA requires the buyer to withhold 15% of the sales price when the seller is a foreign person, with reduced rates when the buyer intends to use the property as a personal residence.⁷

Sales price $300,000 or less, buyer will use as residence: no federal withholding.
Sales price $300,001 to $1,000,000, buyer will use as residence: 10%.
Sales price over $1,000,000, or any non-residential use: 15%.

For the reduced residential rates, the buyer has to be an individual planning to live in the property at least 50% of the days it’s occupied during each of the first two years after purchase.⁸

A foreign seller expecting a lower actual tax bill can apply for a withholding certificate on IRS Form 8288-B to reduce the FIRPTA amount. The two systems run in parallel, so a foreign seller of California property can face both, up to 18⅓% of the sales price held back at closing.⁹

Getting the Money Back

The withholding is a prepayment, not a final tax. To reconcile it, the seller files a California income tax return for the year of the sale: Form 540 for residents, Form 540NR for nonresidents and part-year residents.¹⁰

The seller reports the amount from their copy of Form 593 as a credit against total California tax. When the withholding exceeds the actual tax, which happens often when 3⅓% of a large sales price gets applied to a small gain, the FTB refunds the difference. When the tax exceeds the withholding, the seller pays the balance with the return. The escrow officer must provide the seller with the completed Form 593 within 20 days after the end of the month the sale closed, and holding onto that copy is what lets the seller claim the credit.³

1
California Legislative Information. California Revenue and Taxation Code RTC 18662 – Withholding of Tax on California Real Property
2
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
3
California Franchise Tax Board. 2025 Instructions for Form 593 Real Estate Withholding Statement
4
California Franchise Tax Board. FTB 1024 Penalty Reference Chart
5
Legal Information Institute. California Code of Regulations Title 18 18662-3 – Real Estate Withholding
6
California Franchise Tax Board. Real Estate Installment Sales
7
Office of the Law Revision Counsel. 26 USC 1445 – Withholding of Tax on Dispositions of United States Real Property Interests
8
Internal Revenue Service. Exceptions From FIRPTA Withholding
9
Internal Revenue Service. About Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests
10
California Franchise Tax Board. What Form You Should File