California Real Estate Withholding: Rates, Exemptions, and Form 593

California real estate withholding is a prepayment of state income tax that comes out of the seller’s proceeds at closing whenever California real property sells for more than $100,000. The standard amount is 3⅓% of the gross sales price, collected by the escrow officer and sent to the Franchise Tax Board. It isn’t an extra tax. It’s an advance toward whatever the seller ends up owing on the gain, and it can often be reduced or eliminated entirely by certifying an exemption on FTB Form 593 before escrow closes.¹

When It Applies and Who Is Covered

The rule reaches any sale of California real property over $100,000. Individuals, trusts, estates, corporations, partnerships, and LLCs are all within its scope. It was built to make sure out-of-state sellers paid California tax on California gains, but residents are covered too unless they qualify for an exemption.¹

The real estate escrow person, meaning the title company or escrow officer running the closing, notifies the buyer of the obligation, collects the funds from the seller’s proceeds, and remits them to the FTB. If the escrow person fails to give that notice, or the buyer gets the notice and doesn’t withhold, either one can be personally liable for the tax plus penalties.²

The 3⅓% Standard Rate

With no exemption and no alternative election, 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 the FTB regardless of whether the seller made money on the deal.¹

That gap between what gets withheld and what the seller actually owes is the reason the alternative calculation and the exemptions matter.

Reducing Withholding With the Gain-Based Alternative

A seller who doesn’t qualify for a full exemption but expects their actual tax to be lower than 3⅓% of the price can elect an alternative 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 is the sales price minus the adjusted basis and selling expenses.³

The rate used depends on the type of seller:

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

For individuals, the alternative often cuts the number substantially. Sell a rental for $800,000 that you bought for $600,000, with $40,000 in selling costs, and the estimated gain is $160,000. At 12.3%, the alternative withholding is $19,680, compared with $26,640 under the standard 3⅓% method. The thinner the gain is relative to the price, the larger the swing.³

Exemptions That Eliminate Withholding Entirely

A full exemption drops the withholding to zero. The seller certifies the exemption on Form 593, under penalty of perjury, and gives the signed form to the escrow person before closing. Showing up with it afterward does not work.

The most commonly used exemptions:

Principal residence. The property qualifies as the seller’s main home under Internal Revenue Code Section 121, which requires that the seller owned and lived in it for at least two of the five years before the sale.⁴
Last used as principal residence. Even if the seller no longer meets the two-year test, withholding is waived when the property was last used as the seller’s principal residence.
Loss or zero gain. The adjusted basis equals or exceeds the amount realized. The seller must complete the gain computation in Part VI of Form 593 to show it.
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 (transfer to a controlled corporation) or Section 721 (contribution to a partnership).
California entity. A corporation organized in California or qualified to do intrastate business, or a partnership or LLC organized in California.
Tax-exempt entity. The seller is a tax-exempt organization.

The principal residence and the loss/zero gain certifications cover the great majority of exemption claims. If you’re selling the home you’ve lived in for at least two of the past five years, the withholding simply does not apply.³

1031 Exchanges

A simultaneous like-kind exchange needs no withholding on the main transfer, and the same holds for a deferred exchange where the proceeds go to a qualified intermediary. If the seller receives cash, excess debt relief, or non-like-kind property (boot) over $1,500, withholding applies to that boot at 3⅓%, or the seller can elect the alternative calculation on that portion.⁵ If the exchange later fails, the intermediary must withhold on the full sales price.¹

Installment Sales

If the sale is structured as an installment sale, withholding doesn’t end at closing. The buyer withholds 3⅓% of the down payment during escrow, then 3⅓% of the principal portion of each later installment. Interest isn’t subject to withholding.⁶

For each payment, the buyer calculates the withholding on Form 593, pays it with Form 593-V, and sends it to the FTB by the 20th of the following month. The seller can ask the FTB to approve an election out of the ongoing withholding, and the FTB has 30 days to approve or deny.³

Deadlines and the Seller’s Copy of Form 593

After closing, the escrow person (or other designated remitter) sends the FTB three items: the completed Form 593, the withheld funds, and Form 593-V as the payment voucher. All three are due by the 20th day of the month after the month in which escrow closed. A sale closing March 15 means everything must reach the FTB by April 20.⁷

Within the same window, the remitter must give the seller a copy of the completed Form 593. Keep it. You need it to claim the credit on your California return.³

Penalties for Getting It Wrong

California splits the penalties by who missed what:

Escrow person fails to notify the buyer: the greater of $500 or 10% of the amount that should have been withheld.
Buyer fails to withhold after being notified: the greater of $500 or 10% of the required withholding.
Seller files a false exemption certificate: the greater of $1,000 or 20% of the required withholding. This is the heaviest penalty, aimed at sellers who certify an exemption they know they don’t qualify for.
Failure to furnish Form 593 to the seller: up to $130 per form, or if intentional, the greater of $330 or 10% of the required withholding.
Late filing of Form 593 with the FTB: $40 within 30 days late, $80 at 31 days to 6 months late, $130 after 6 months.²

Getting the Money Back on Your Tax Return

The withholding is a prepayment, not a final tax. To reconcile it, file a California income tax return for the year the sale closed. Residents file Form 540. Nonresidents and part-year residents file Form 540NR.⁸

Report the amount shown on your copy of Form 593 as a credit against the tax owed for the year. If the withholding came out higher than the actual tax, which happens often when the standard 3⅓% rate hits a low-gain or no-gain sale, the FTB refunds the difference. If the tax is higher, you pay the balance with the return.

Foreign Sellers Also Face FIRPTA

If the seller is a foreign person, federal law adds a separate layer of withholding on top of California’s. Under the Foreign Investment in Real Property Tax Act, the buyer must withhold 15% of the sales price when a foreign person sells U.S. real property.⁹

Reduced rates apply when the buyer intends to use the property as a personal residence:

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

To qualify for the reduced residential rates, the buyer must be an individual who plans to live in the property at least 50% of the days it’s occupied during each of the first two years after purchase.¹⁰ A foreign seller who expects the actual tax to be lower than the FIRPTA number can apply for a withholding certificate on IRS Form 8288-B to reduce or eliminate it.¹¹ The federal withholding is completely separate from the California 3⅓%, so a foreign seller of California real property could see both stack up to as much as 18⅓% of the sales price held back at closing.

1
California Legislative Information. California Revenue and Taxation Code RTC 18662 – Withholding of Tax on California Real Property
2
California Franchise Tax Board. FTB 1024 Penalty Reference Chart
3
California Franchise Tax Board. 2025 Instructions for Form 593 Real Estate Withholding Statement
4
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
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
Legal Information Institute. California Code of Regulations Title 18 18662-8 – Reporting and Remitting
8
California Franchise Tax Board. What Form You Should File
9
Office of the Law Revision Counsel. 26 USC 1445 – Withholding of Tax on Dispositions of United States Real Property Interests
10
Internal Revenue Service. Exceptions From FIRPTA Withholding
11
Internal Revenue Service. About Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests