California Real Estate Withholding for Out-of-State Sellers: What LA Homeowners Need to Know

You moved to Austin in 2022. You kept the house in the Hollywood Hills because the market softened and the timing never felt right to sell. Now it is. You list, you get an offer, you open escrow.

And then escrow calls to tell you that California is going to withhold $180,000 from your proceeds before you see a check.

That number catches most out-of-state sellers completely off guard. It is not a penalty. It is not a fine. It is a prepayment toward the California income tax you will owe on the gain from the sale. But it sits in a government account until you file a California nonresident tax return, and at the price points Los Angeles operates at, it can be a six-figure sum held back on closing day.

Here is how it works, what triggers it, when you can reduce it, and what you need to do before you list.

What California's Withholding Rule Actually Is

California Revenue and Taxation Code Section 18662 requires that when a nonresident sells California real property, a portion of the sale proceeds be withheld and sent to the Franchise Tax Board as a prepayment of the seller's California income tax liability.

The default withholding rate is 3.33 percent of the gross sale price. That is not 3.33 percent of your gain. It is 3.33 percent of whatever the buyer pays for the property.

The escrow company is the withholding agent here. When you close, escrow sends that amount to the FTB within 20 days of the end of the calendar month in which the sale closed. The form used is FTB Form 593, the Real Estate Withholding Statement.

The key thing to understand is that this is a prepayment, not the final tax bill. After you close, you file a California nonresident return (Form 540NR) for that tax year. The amount withheld gets credited against your actual California income tax liability. If your real liability is less than what was withheld, you receive a refund. If it is more, you pay the difference.

The withholding mechanism exists because California has no other reliable way to collect income tax from people who live outside the state and may never file a California return again.

Moving to Texas or Nevada Does Not Eliminate the California Tax

This surprises a lot of people. You relocate to a state with no income tax. You change your driver's license, your voter registration, your domicile. You pay no state income taxes there.

But California still taxes the gain from the sale of California real property, regardless of where you live when you sell it. California source rules treat income from California real estate as California-source income no matter the seller's state of residence. The FTB can and does pursue out-of-state sellers who fail to file.

Moving to Texas, Nevada, Florida, Arizona, or any other low-tax or no-tax state does not create an exemption. It means you file California taxes only on California-source income, which includes the gain on your LA home.

When the Withholding Does Not Apply

There are situations where you can reduce or eliminate the withholding by filing an exemption certificate (Form 593-C) with your escrow company before close. The four that matter most in the LA market are:

Principal residence exclusion. If you owned and used the property as your primary residence for at least two of the five years immediately before the sale date, you may qualify for the federal Section 121 exclusion. California conforms to the federal exclusion, so if your gain falls within the $250,000 single filer or $500,000 married filing jointly limits, no withholding is required. The critical word is "used." The two-year use test runs from the date you actually moved out, not from when you listed the property.

Sale at a loss. If your adjusted basis (what you paid plus improvements, minus depreciation) exceeds the sale price, there is no gain and no withholding. You certify this on Form 593-C and escrow releases the full proceeds.

Like-kind exchange. If you are rolling the proceeds into a replacement property through a qualified Section 1031 exchange, no withholding is required on the deferred gain. A qualified intermediary must be in place before close, and the exchange must meet all federal and state requirements.

Installment sale. If the buyer is paying you over time through a seller carryback arrangement, withholding is applied proportionally to each installment payment received rather than to the full sale price at close.

The Two-Rate Option and When the Alternative Makes More Sense

Most sellers default to the 3.33 percent rate because it is the standard. But there is a second option: elect to withhold 12.3 percent of the recognized gain instead of 3.33 percent of the price.

At first glance, 12.3 percent sounds worse. But the math flips when your gain is low relative to your sale price.

Take a seller who bought a Sherman Oaks home in late 2023 for $2.1 million and is selling in 2026 for $2.3 million. The gain is $200,000.

Under the default rate: 3.33 percent of $2.3 million is $76,590 withheld.

Under the alternative rate: 12.3 percent of $200,000 is $24,600 withheld.

That is more than $50,000 in difference at close. The alternative election must be made in writing through your escrow company before the transaction closes. You cannot go back and retroactively elect it after the money has already been sent to the FTB.

The Section 121 Time Trap

The principal residence exclusion has a strict clock. You need to have lived in the home as your primary residence for two of the five years immediately before the sale.

If you moved out of California in 2021 and are selling in 2026, the five-year window runs from 2021 to 2026. Depending on your exact move-out date and sale date, you may have closed the window entirely. Once more than three years have passed since you moved out, the two-of-five test is impossible to satisfy and the exclusion is gone.

This is one of the most common surprises for former LA homeowners. They kept the property intending to eventually sell, and they kept it just long enough to lose the exclusion. On a home that appreciated significantly, that can mean paying California income tax at up to 13.3 percent on the full gain.

If you are approaching the three-year mark from when you moved out and still own an LA property, that timing alone is worth a conversation with a CPA who handles California nonresident sales.

The Math at LA Price Points

The numbers become significant quickly in this market.

On a $5.5 million sale, the default 3.33 percent withholding is $183,150. But that is the prepayment. If you moved out four years ago and have a gain of $3 million, your actual California income tax liability at the top marginal rate is closer to $400,000. The withholding covers less than half of the actual bill. The rest comes due when you file your 540NR.

For properties in the City of Los Angeles above the Measure ULA thresholds, the picture gets more crowded. A $6 million sale in the Hollywood Hills triggers the 4 percent Measure ULA transfer tax on the seller on top of the withholding. Between Measure ULA and the state withholding, over $400,000 can leave escrow before you see your net proceeds check. That number does not include the escrow fee, title insurance, or agent commissions. Your net sheet needs to account for all of it.

You can read more about how Measure ULA affects your net proceeds and review the full LA seller closing cost breakdown for a complete picture.

What You Need to Do Before You List

Pull your move-out date and check the §121 window. If you moved out more than three years ago, the principal residence exclusion is gone. If you moved out two to three years ago, it depends on the exact dates. Know which situation you are in before you price the home, because the tax liability changes your actual net significantly.

Calculate your adjusted basis. Your taxable gain is not sale price minus what you paid. It is sale price minus your adjusted basis, which includes what you paid, capital improvements, selling costs, and any depreciation taken if the property was rented. Get this number from your records or your CPA before you list.

Decide whether to file a Form 593-C exemption certificate. If you qualify for the §121 exclusion, the installment sale treatment, or another exemption, you need to file this with escrow before close. It is not automatic. If you miss the filing, escrow withholds the default 3.33 percent and remits it to the FTB, and you wait until you file your 540NR to get any overpayment back.

Consider the alternative withholding rate. If your gain is modest relative to the sale price, run the math on the 12.3 percent of gain election. On a large sale with low appreciation, it can save tens of thousands of dollars at close.

Work with a CPA or tax advisor familiar with California nonresident sales. This is not something to figure out at the closing table. The form has to be in before the transaction funds.

If you are a foreign national selling an LA property rather than a US citizen who moved out of state, the rules are different. Federal FIRPTA withholding applies in addition to the California withholding, and the rates and forms are distinct. You can find that explanation in our post on FIRPTA and the Los Angeles home sale.

Frequently Asked Questions

Does moving out of California mean I no longer owe California taxes when I sell my home there?

No. California taxes gains from the sale of California real property as California-source income, regardless of where the seller lives at the time of sale. Whether you moved to Texas, Nevada, Florida, or anywhere else, you still owe California income tax on the gain from an LA property sale and must file a California nonresident return (Form 540NR) for that year.

How much does California withhold from my proceeds at closing?

The default is 3.33 percent of the gross sale price. On a $5 million sale, that is $166,500 withheld at close. There is an alternative rate of 12.3 percent of the recognized gain, which may result in less withholding when the gain is low relative to the sale price. You must elect the alternative rate in writing through your escrow company before the transaction closes.

What is Form 593 and why does my escrow company need it?

Form 593 is the California Real Estate Withholding Statement. Escrow is required to complete it and remit the withheld amount to the Franchise Tax Board within 20 days of the end of the month in which escrow closes. If you are claiming an exemption from withholding, you file a separate Form 593-C (the exemption certificate) with escrow before close. Without that certificate, escrow withholds the default rate.

Can I avoid California withholding if I sold at a loss?

Yes. If your adjusted basis exceeds your sale price, there is no gain and no withholding required. You certify the loss on Form 593-C filed with escrow. You will need documentation of your basis, including the original purchase price and any capital improvements.

What if my home was my principal residence but I moved out three years ago?

You may or may not still qualify for the Section 121 exclusion. The requirement is that you owned and used the property as your primary residence for at least two of the five years immediately before the sale date. If your move-out date and sale date are more than three years apart, the two-of-five window has closed and the exclusion is no longer available. If it is close, the exact dates matter. A CPA familiar with California nonresident transactions can calculate whether you still qualify.

When do I get my withheld money back?

After you close, you file a California Form 540NR for the year of sale. The withheld amount is credited against your actual California tax liability. If the withholding exceeded your liability, the FTB issues a refund. Processing can take several months after you file, and filing season timing affects how quickly refunds are issued.

Do I still owe California taxes if I sell through a 1031 exchange?

No California withholding is required at close if the sale is part of a properly structured like-kind exchange. The California gain is deferred along with the federal gain, and no withholding is triggered. A qualified intermediary must be in place before escrow closes. If the exchange fails or is partially executed, the California withholding rules apply to the taxable portion.

If you own an LA home and you have moved out of state, the smartest first step is knowing exactly what you will net before you commit to a price. That starts with a real seller's net sheet, not a Zestimate.

Request a professional home valuation and net sheet at greysq.com/home-value or contact the Grey Square team directly to talk through the sale.

About the author: Paul Blair is the founder and broker of Grey Square, a virtual real estate brokerage representing buyers and sellers across Dallas and Los Angeles. With 22 years in the business and more than $200 million in closed transactions, Paul works the full range of the market, from luxury homes in the Park Cities and Preston Hollow to estates in the Hollywood Hills and across the Westside. Connect with Paul and the Grey Square team at greysq.com. TX TREC #9011505 | CA DRE #01792671.