When you sell California real estate for more than $100,000, escrow is generally required to withhold 3⅓% of the total sales price and send it to the Franchise Tax Board (FTB) unless you certify an exemption on FTB Form 593. On a $700,000 sale, that is about $23,333 held back at closing. The most common ways out are certifying that the house was your principal residence or that the sale produces a loss or zero gain. That second exemption is the one most heirs selling an inherited house can use.

Form 593 confuses sellers because it shows up in the escrow package as one more signature, and the consequences of checking the wrong box are not obvious. This post explains who withholds, when, how much, which exemptions apply to the most common home-sale situations, and how to get over-withheld money back.

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What Real Estate Withholding Is, and Why California Has It

California taxes gain on California real estate even when the seller lives somewhere else. Withholding at closing is how the state makes sure it collects something before the money leaves escrow. It is a prepayment toward the seller’s California income tax, not a separate tax. The seller reports the sale on a California return, claims the withheld amount as a credit, and either owes the difference or gets a refund.

The person who actually collects the money is the real estate escrow person, or REEP. FTB defines the REEP as anyone involved in closing the transaction who receives and disburses the sale funds. That usually means the escrow company, but it can also be a title company, an attorney or a qualified intermediary in a 1031 exchange. The REEP has to notify the buyer of the withholding requirement, collect the seller’s certifications on Form 593, withhold if required, and send the money and the form to FTB.

How Much Is Withheld: Two Methods

FTB allows two ways to calculate the amount.

Total sales price method. Withhold 3⅓% (0.0333) of the selling price. This is the default, and it is simple. It ignores how much gain there actually is, so a seller with little profit can have far more withheld than they will owe.
Optional gain on sale election. The seller estimates the gain in Part VI of Form 593 and multiplies it by the seller’s maximum tax rate. For individuals, FTB’s 2026 instructions show that rate as 12.3%. When the gain is small compared with the price, this method can mean much less withheld. It requires the seller to complete and sign the computation.

A hypothetical example shows the difference. An individual sells a rental for $600,000. The adjusted basis is $520,000 and the selling expenses are $40,000, so the estimated gain is $40,000. Under the sales price method, escrow withholds about $19,980. Under the gain election, the withholding is $40,000 × 12.3%, or $4,920. The final tax owed is the same either way. The difference is how much cash the seller waits a year to get back.

No Withholding at All: The $100,000 Line

Withholding is not required when the sales price is $100,000 or less. Few California houses sell for that little, but some rural lots, cabins and fractional interests do. The threshold is based on the sales price, not on the seller’s share or the gain.

Full Exemptions Most Home Sellers Use

Part III of Form 593 lists certifications that fully exempt a sale. For individuals and families selling a home, the important ones are:

Principal residence. The property qualifies as the seller’s principal residence under Internal Revenue Code section 121. Generally, the seller must have owned it and lived in it as a main home for at least two of the five years ending on the sale date, with some exceptions for a job change, health or unforeseen circumstances.
Last used as principal residence. The property was last used as the seller’s principal residence. This certification applies for withholding purposes only, and it does not decide whether any gain is taxable.
Loss or zero gain. The amount realized is equal to or less than the adjusted basis, as computed in Part VI.
Involuntary conversion. The property was compulsorily or involuntarily converted, and the seller intends to acquire qualifying replacement property under IRC section 1033.

Other Part III exemptions apply to sellers that are California corporations, California partnerships, tax-exempt entities, insurance companies, IRAs, qualified pension and profit-sharing plans, and charitable remainder trusts. Single-member LLCs that are disregarded for tax purposes do not qualify as partnerships for this purpose. FTB’s Publication 1016 covers each certification in detail.

Note what a principal residence exemption from withholding does not do. It does not decide whether you owe tax on the gain. A seller can be exempt from withholding and still owe tax on gain above the federal exclusion. Our guide to the capital gains exclusion when selling a California home covers that separate question.

The Inherited House: Why Heirs Often Owe Little and Pay Nothing at Closing

Inherited property is a common place for unnecessary withholding. Under federal tax law, an heir’s basis in inherited property is generally its fair market value on the date of death. That is the “stepped-up basis” explained in our article on capital gains on inherited California property. If the house is sold within a year or two of the death for close to its date-of-death value, the sale price minus selling costs is often at or below that basis. That means a loss or zero gain.

In that case, the heir, or the estate or trust that is selling, can certify the loss or zero gain exemption in Part III and complete the computation in Part VI. No withholding is required. Without that certification, escrow withholds 3⅓% of the full price, and the family waits until the next tax season to get it back.

Publication 1016 adds two points that matter for estates and trusts:

An estate gets no exemption just because the person who died was a California resident. The estate has to qualify under one of the listed exemptions, such as loss or zero gain.
A nongrantor trust, which most living trusts become after the person who created them dies, reports withholding under the trust’s own name and federal employer identification number, not the trustee’s. If the trust distributes the gain to beneficiaries, it files Form 592 to pass the withholding credit through to them.

Get a date-of-death appraisal early. It supports the basis figure on Form 593 and on the tax return, and it is usually needed for the estate anyway. Our guide for out-of-state heirs selling California property covers the other paperwork escrow will request.

Several Sellers on One Deed

Many California houses have more than one owner, such as siblings who inherited together or unmarried partners. FTB’s instructions say to use a separate Form 593 for each seller. Each seller enters an ownership percentage, and the withholding is figured on that seller’s share of the price. Spouses or registered domestic partners who plan to file a joint return can be listed together on one form, which treats them as equal owners. If their shares are not equal, they file separate forms.

Each co-owner also chooses an exemption separately. In a sale of a house owned by a mother and her adult son, the son may qualify for the principal residence exemption because he lived there, while the mother, who moved out years ago, may not. One seller can be fully exempt while escrow withholds 3⅓% of the other seller’s share.

Since a grantor trust becomes irrevocable when the grantor dies, FTB’s instructions say to report that trust under the trust’s own name and federal employer identification number. Do not use the name or Social Security number of the person who died or of the trustee. A successor trustee selling a parent’s house should get that number before escrow closes. The trust usually needs it anyway to open a bank account for the sale proceeds.

Common Situations, Side by Side

These hypothetical examples show how the rules usually play out:

A couple selling the home they have lived in for ten years. They certify the principal residence exemption, and nothing is withheld.
An owner selling a former home that has been rented out for six years. The principal residence test is not met. If there is a real gain, escrow withholds 3⅓% of the price or the gain-election amount.
An heir selling a parent’s house eight months after the death for about the date-of-death value. After selling costs, the sale usually shows a loss or zero gain, so the heir certifies that exemption and nothing is withheld.
An heir selling a parent’s house four years after the death, after a large rise in value. There may be a real gain. The heir can use the gain election to reduce withholding to 12.3% of the estimated gain.
A seller of a vacant lot for $85,000. The price is below $100,000, so no withholding is required.
An investor exchanging a rental into another property through a qualified intermediary under section 1031. If no boot is received, nothing is withheld at the first closing.

Partial Exemptions: 1031 Exchanges and Installment Sales

Two situations reduce or postpone withholding instead of eliminating it.

A like-kind exchange under IRC section 1031 is a partial exemption. If the seller completes the exchange with no cash or other boot received, there is no withholding. If boot of more than $1,500 is received, withholding applies to the boot. Our article on 1031 exchanges on California rental property covers the exchange rules themselves.

In an installment sale, where the buyer pays over time, the buyer withholds 3⅓% of the principal part of the down payment and of each later payment. A seller who wants to stop that can report the full gain in the year of sale and ask FTB in writing to release the buyer. FTB approves or denies the request within 30 days, and the buyer keeps withholding until it receives approval.

When the Money Goes to FTB, and How the Seller Gets Credit

The REEP must send Form 593, the payment and the payment voucher, Form 593-V, to FTB by the 20th day of the calendar month after the month escrow closes. The seller must receive a copy of Form 593 by the same date. Keep it with your tax records.

To get credit, the seller files a California income tax return for the year of the sale, reports the sale, and claims the amount from Form 593 as withholding. FTB’s guidance says it refunds any overpayment only after processing that return, and it does not issue early refunds. You can confirm the credit FTB has on file through a MyFTB account or by calling 916-845-4900.

For a nonresident heir who has no other California income, this means filing a California nonresident return just to recover the withholding. That is one more reason to use a valid exemption at closing when one applies.

Penalties: Why Escrow Insists on the Form

Escrow officers treat Form 593 seriously because the penalties fall on them and on buyers:

If the REEP fails to notify the buyer of the withholding requirement in writing, the penalty is the greater of $500 or 10% of the required withholding.
If a buyer who was notified fails to withhold, the same greater-of-$500-or-10% penalty applies.
A seller who knowingly signs a false exemption certificate faces a penalty of the greater of $1,000 or 20% of the amount that should have been withheld.

That last penalty is the one sellers should remember. Do not check the principal residence box for a house you did not live in for two of the last five years, and do not certify a loss without numbers to support it. If you are unsure, let escrow withhold and sort it out on your return, or ask a tax professional before closing.

A Closing Day Walk-Through

Here is how Form 593 usually moves through a typical sale:

Escrow opens, and the escrow officer sends the seller a package that includes Form 593 or asks the questions needed to complete it.
The seller decides which exemption, if any, applies, and gathers support. For a principal residence that might be proof of occupancy. For an inherited house, it is the date-of-death value and the estimated selling costs.
The seller signs Form 593 under penalty of perjury.
At closing, escrow either withholds 3⅓%, withholds the gain-election amount, or withholds nothing if an exemption was certified.
By the 20th of the following month, escrow sends the form and any payment to FTB and gives the seller a copy.
The following spring, the seller files a California return and claims any withholding as a credit.

When This Should Not Drive Your Decision to Sell

Withholding is a timing issue, not a cost. Do not let a 3⅓% hold-back push you into a quick sale at a lower price, or keep you from selling at all. If the house is in good shape and you have time, listing it on the open market will usually net more than a direct sale, and the withholding works the same way in both cases. The tax you actually owe depends on your gain, not on how the sale is structured.

A direct cash sale makes sense for other reasons: a house that needs major work, a vacant inherited property costing money every month, tenants or occupants, or heirs who live far away and need a simple closing. In those cases, Form 593 is just one of the forms escrow will walk you through.

Quick Answers

Does Form 593 apply if I sell to a family member? Yes. Withholding depends on the sale, not the relationship. The same exemptions apply.

Is withholding required in a foreclosure? Special rules apply to certain foreclosure transfers. Ask the trustee or escrow handling the sale, and check FTB Publication 1016 for current guidance.

What if escrow withheld and I qualified for an exemption? You still get the money back, but only by filing a California return for the year of the sale.

If you are selling anywhere in the state and want a simple process, our page on how to sell my house fast in California explains how a direct sale works, including the escrow paperwork. For a no-obligation cash offer, contact Cash Home Buyers CA or call (424) 435-2326. When you sell to us, we pay the standard closing costs, including the county and city transfer taxes, escrow and title. You can also find us on Google for our office location and hours.

FTB Form 593: Why Escrow Holds Back 3⅓% of a California Home Sale and How to Avoid It