California Real Estate Withholding Explained

California requires the buyer (or more commonly, the escrow agent handling the transaction) to withhold 3.33% of the gross sales price whenever a nonresident of California sells real property located in the state. This requirement is codified in California Revenue and Taxation Code Section 18662 and implemented through Form 593, the Real Estate Withholding Statement.

The purpose of this withholding is to ensure that nonresident sellers pay their California tax obligation on the sale before the transaction closes. California wants its share upfront, rather than trusting that a former resident living in Texas will voluntarily file and pay.

The withholding is calculated on the gross sales price, not on the gain. This is an important distinction. If you sell a property for $1 million and your taxable gain is $50,000, the withholding is still $33,300 (3.33% of $1 million).

Here is what that looks like in real scenarios:

The withholding is a prepayment, not a final tax. When you file your California nonresident return (Form 540NR), you calculate your actual California tax on the gain. If the withholding exceeds your tax liability, you receive a refund. If it falls short, you owe the difference.

Yes. California allows sellers to apply for a reduced withholding certificate from the FTB if they can demonstrate that the 3.33% withholding significantly exceeds their actual California tax liability. This is done using Form 593 at the time of the transaction.

Common scenarios where reduced withholding applies:

• Selling at a loss: If you purchased the property for more than the sales price, you have no California tax liability on the sale. You can certify this on Form 593 and reduce withholding to zero.
• Principal residence exclusion: If the sale qualifies for the full IRC Section 121 exclusion (up to $250,000 single / $500,000 married filing jointly) and your gain is entirely within the exclusion, your California tax liability may be zero.
• Gain-based calculation: Sellers may elect to have withholding calculated on the gain rather than the gross sales price. This requires providing documentation of the adjusted basis to the escrow agent.

The reduced withholding election is made on Form 593, which the seller completes and provides to the escrow agent before closing. If you want to pursue reduced withholding, you must have your CPA or tax advisor prepare the calculation and supporting documentation before the closing date.

Federal FIRPTA (Foreign Investment in Real Property Tax Act) is a separate withholding requirement that applies to foreign persons selling U.S. real property. The federal rate is typically 15% of the gross sales price, withheld by the buyer and remitted to the IRS.

If you are a U.S. citizen or permanent resident moving from California to Texas, FIRPTA generally does not apply to you — you are not a "foreign person" for FIRPTA purposes. However, the California withholding requirement is entirely separate and applies regardless of your citizenship or immigration status.

In rare cases where both FIRPTA and California withholding apply (for example, a foreign person selling California property), both withholdings are required. The buyer must withhold 15% for the IRS and separately ensure 3.33% is remitted to the FTB.

When you file your California return for the year of the sale, you reconcile the withholding against your actual tax liability:

1. Report the sale on your California return (Form 540NR for nonresidents). Include the gross sales price, your adjusted basis, and the resulting gain or loss.
2. Apply the withholding as a credit against your California tax liability. The 3.33% withheld is treated as estimated tax payments.
3. Calculate your actual tax. This depends on the gain, your filing status, your other California-source income, and applicable deductions.
4. Result: If your actual tax is less than the withholding, you receive a refund. If your actual tax exceeds the withholding, you owe the difference.

The refund process typically takes 8 to 12 weeks if you file electronically and there are no issues. Paper-filed returns can take longer. The FTB may hold refunds if there are discrepancies or if your return is selected for review.

Filing Deadlines

California nonresident returns are due on the same date as resident returns — typically April 15. You can request an extension to October 15, but the extension is for filing, not for payment. Any tax owed is still due by April 15. Since the withholding is already remitted to the FTB, many nonresident sellers find they are owed a refund and face no additional payment obligation.

Let's walk through a complete example with real numbers.

Facts

• Married couple, both age 45
• Bought California home in 2016 for $700,000
• Moved to Texas in January 2025 (established Texas residency)
• Sold California home in March 2025 for $1,400,000
• Lived in home as primary residence from 2016 to 2024 (4 of the last 5 years met)
• No California-source income other than the home sale

Step 1: Federal Tax (IRC Section 121)

Gain = $1,400,000 − $700,000 = $700,000. Married filing jointly exclusion = $500,000. Federally taxable gain = $200,000. At a federal long-term capital gains rate of 15%, federal tax on the gain = approximately $30,000.

Step 2: California Tax

California conforms to the $500,000 exclusion. California taxable gain = $200,000. But California taxes capital gains as ordinary income, not at preferential rates. At a marginal rate of approximately 9.3%, California tax = approximately $18,600.

Step 3: Withholding at Closing

3.33% × $1,400,000 = $46,620 withheld by escrow and remitted to the FTB.

Step 4: Tax Return Reconciliation

Actual California tax on the gain: approximately $18,600. Withholding: $46,620. Refund due from FTB: approximately $28,020. The couple files Form 540NR and receives a refund of the overpayment.

• The 3.33% withholding on nonresident property sales is mandatory. If you sell California real estate after establishing Texas residency, escrow will withhold and remit to the FTB. Plan for this in your cash flow.
• You may be able to reduce or eliminate withholding by filing Form 593 at closing with proper documentation. Work with your CPA before the closing date to prepare this.
• The withholding is a prepayment, not a final tax. Most sellers who use the Section 121 exclusion on their primary residence receive a substantial refund.
• California withholding is separate from federal FIRPTA. If you are a U.S. citizen, FIRPTA likely does not apply, but California withholding does.
• File your California nonresident return (Form 540NR) to reconcile and claim any refund. Do not skip this step.
• Keep copies of Form 593, your closing statement, and all records of the transaction for at least four years.