The “California exit tax” on real estate is not actually a tax. It’s a withholding requirement: when California real property is sold, the state collects 3⅓% of the sales price at closing as a prepayment toward whatever California income tax the seller will owe on the gain. If the amount withheld is more than the eventual tax, the seller gets a refund after filing a California return. If it’s less, the seller pays the difference. The nickname stuck because the rule hits nonresidents and departing residents hardest, but the mechanism is withholding, not a departure penalty.
Why It’s Called an Exit Tax
If you’re leaving California and selling your home, having the state hold back a slice of your proceeds feels like a toll for leaving. It isn’t. The withholding applies to many transactions that have nothing to do with moving, and California residents can get caught too if they don’t properly certify an exemption before escrow closes. The withheld amount is a credit against California income tax, no different in concept from the taxes withheld from a paycheck.
A separate point worth clearing up: proposals like AB 2088, which would have imposed an annual 0.4% tax on worldwide net worth above $30 million and reached former residents for up to ten years after leaving, have generated headlines but have not become law. The only “exit tax” that actually exists is the real estate withholding described here.
Who Gets Withheld On
The requirement reaches individuals, trusts, estates, corporations, partnerships, and LLCs — essentially anyone disposing of California real property. Nonresidents are the primary target, but California residents also get withheld on if they don’t certify their exemption status on FTB Form 593 before escrow closes.1Cornell Law Institute. California Code of Regulations Title 18 18662-3 – Real Estate Withholding Miss that form by closing and the escrow company withholds regardless of residency.
The legal duty to withhold technically falls on the buyer, but in practice the escrow officer runs the calculation, collects the funds, and remits them to the Franchise Tax Board. Sellers deal with escrow; buyers rarely touch any of this directly.
Exemptions That Eliminate or Reduce Withholding
Not every sale triggers withholding. You claim an exemption in writing on FTB Form 593 before escrow closes. Miss the deadline and escrow must withhold the full amount.1Cornell Law Institute. California Code of Regulations Title 18 18662-3 – Real Estate Withholding
The exemptions most sellers rely on:
- 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. The federal exclusion shields up to $250,000 in gain ($500,000 for married couples filing jointly).2Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
- Last used as principal residence. The property was the last home you actually lived in. A vacation home or rental you never occupied does not qualify.3Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
- Loss or zero gain. If your adjusted basis equals or exceeds the sale price, no withholding is required, but you must complete the gain calculation in Part VI of Form 593 to certify it.3Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
- Sales price of $100,000 or less.1Cornell Law Institute. California Code of Regulations Title 18 18662-3 – Real Estate Withholding
- Involuntary conversion. The property was seized, destroyed, or condemned and you intend to acquire similar replacement property under IRC Section 1033.3Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
- Certain entity sellers. A corporation or partnership with a permanent place of business in California is exempt. For corporations, that means being organized under California law or qualified with the Secretary of State to transact intrastate business.3Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
- IRC Section 351 or 721 transfers to a controlled corporation or a partnership in exchange for an interest.
- Foreclosures and sales where the seller is a bank acting as trustee (other than under a deed of trust).
How Much Gets Withheld
When no exemption applies, escrow calculates the withholding using one of two methods. The choice can tie up thousands of dollars that don’t need to be sitting with the FTB until you file.
Standard Method: 3⅓% of the Sales Price
The default withholds 3⅓% (0.0333) of the total sales price.4Franchise Tax Board. 2025 Instructions for Form 593 Real Estate Withholding Statement It applies to the gross price, not the net proceeds after mortgages, liens, or closing costs. On a $900,000 sale, withholding runs about $29,970 even if you still owe $600,000 on the loan.
Simple, but it overwithholds whenever your actual gain is a small share of the sale price. Buy at $800,000, sell at $900,000, and your gain is $100,000; the state still bases withholding on the full $900,000.
Alternative Method: Based on Estimated Gain
The alternative calculation bases withholding on your estimated profit. You compute the gain in Part VI of Form 593, then multiply by your applicable rate:5Franchise Tax Board. 2025 Form 593 Real Estate Withholding Statement
- 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%
Same example: a $900,000 sale with $100,000 of gain. An individual seller using the alternative method would have $12,300 withheld instead of $29,970. The tradeoff is paperwork and accuracy; you certify basis and gain on Form 593, and understating the gain can produce penalties when you file.
California Taxes Capital Gains as Ordinary Income
Something that catches sellers off guard: California does not offer a reduced rate for capital gains. All capital gains are taxed as ordinary income.6Franchise Tax Board. Capital Gains and Losses Federal law applies preferential long-term rates of 0%, 15%, or 20% depending on income, but California runs its full progressive income tax, topping out at 13.3% on income above $1 million (which includes a 1% Mental Health Services Tax surcharge).
For a nonresident with a large gain, the combined federal and California bill can be significant. The withholding only covers part of the California piece. Federal capital gains tax is separate and reported on the federal return.
Special Cases: 1031 Exchanges and Installment Sales
Like-Kind Exchanges Under IRC Section 1031
In a deferred like-kind exchange, the qualified intermediary holding the proceeds carries the withholding duty. If the exchange qualifies and the seller certifies the exemption on Form 593 (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.7Franchise Tax Board. Qualified Intermediary
Even in a successful exchange, if the seller receives boot (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.7Franchise Tax Board. Qualified Intermediary Many 1031 sellers assume the exchange exempts them entirely and are surprised when boot triggers withholding.
Installment Sales
When the seller finances part of the sale through a note, withholding does not happen all at once. Escrow withholds 3⅓% of the down payment at closing. The buyer then becomes responsible for withholding on the principal portion of each installment payment. Interest is not subject to withholding. Each payment is remitted with Form 593-V and a completed Form 593 by the 20th of the month after payment, and the final payment is marked “Final Installment Payment” at the bottom of Form 593.8Franchise Tax Board. Real Estate Installment Sales Buyers taking on seller financing should understand this ongoing obligation before signing.
Penalties That Reach the Seller
A seller who knowingly certifies a false exemption on Form 593 to avoid withholding faces a penalty of $1,000 or 20% of the required withholding, whichever is greater. Buyers and escrow companies have their own penalties for failing to withhold or failing to notify, each the greater of $500 or 10% of the amount that should have been withheld, and they can raise a reasonable-cause defense.9Cornell Law Institute. California Code of Regulations Title 18 18662-8 – Reporting and Remitting A seller who deliberately lies on the form does not get that defense.
Getting the Withheld Money Back
The withheld amount appears as a tax credit on your California return for the year the sale closed, similar to how employer withholding shows up on a W-2. Nonresidents and part-year residents file Form 540NR to report California-source income and claim the credit.10Franchise Tax Board. 2025 540NR Booklet California residents file Form 540.
On the return you report the actual capital gain, compute California tax at ordinary income rates, and apply the withholding as a payment. If withholding exceeded your tax (common under the standard 3⅓% method), the FTB refunds the difference. If it fell short, you pay the balance with the return. Either way, the withholding is a prepayment, not a permanent loss. The one thing that locks the money up for good is not filing. The FTB won’t refund an overpayment until you file the California return, even if you’ve long since moved to another state.