Updated August 16, 2026
California requires the escrow holder to withhold and remit 3 1/3% of the gross sale price to the Franchise Tax Board at closing, unless the seller qualifies for an exemption or elects an alternative calculation. It is reported on FTB Form 593, which the seller signs and returns to escrow before the transaction closes. This is not a tax — it is a prepayment against whatever California income tax turns out to be owed, credited when you file your return. But it comes out of your proceeds on closing day, so it belongs in your net sheet from the beginning. On a $6,000,000 apartment building, 3 1/3% is $200,000 leaving the closing statement before you see a dollar.
The rule is broader than most sellers assume. Withholding is not limited to out-of-state owners — that is the most common misconception about it.
Out-of-state and non-resident sellers. Always in scope absent an exemption. This is the case the rule was written for.
California residents. Also subject to withholding, but with a certification available on Form 593 for sellers who qualify — most commonly the principal residence exclusion, which does not help an apartment building owner.
Entities. LLCs, partnerships, corporations, and trusts each have their own treatment, and a non-California entity holding California real property is squarely in scope.
Sales of $100,000 or less. Exempt. Not a threshold that reaches multifamily.
The default is 3 1/3% of gross sale price. That is a blunt instrument: it withholds against the whole price without regard to your basis or your actual gain.
The alternative is to elect withholding based on the actual gain at the applicable rate. On a building with a large loan balance, a high basis, or a modest gain, the gain-based calculation can withhold substantially less — sometimes a fraction of the default. On a long-held, fully depreciated LA building with a very low basis, the default may well be lower than the gain-based number, because the gain is enormous relative to the price.
The election is made on Form 593, and it requires actual numbers — basis, improvements, depreciation taken, selling costs. Your CPA should be running that comparison before escrow closes, not after. Once the withholding is remitted, recovering an overpayment means waiting for your return.
A properly completed exchange generally avoids the withholding at closing. The seller certifies the exchange on Form 593 and the funds go to the qualified intermediary rather than through a withholding.
A failed or partial exchange triggers it. If the exchange does not complete, or you take boot, withholding obligations attach to the portion that is not exchanged. Form 593 is also used to report exchanges that were completed or that failed during the year.
Timing matters at year end. An exchange that begins in one tax year and fails in the next has specific reporting consequences. This is a genuine trap and a reason to have the CPA involved in the exchange from day one rather than at filing time.
Discovering it at the closing table. The number is large and it is entirely predictable. It should appear on the first net sheet.
Assuming a 1031 makes it disappear permanently. It defers the income tax; the withholding follows the exchange's outcome, not its intention.
Forgetting that withholding is not the tax. Sellers sometimes treat the 3 1/3% as the final California cost of the sale. It is a deposit. The actual liability — capital gain, depreciation recapture, and California's ordinary-income treatment of gains — is computed on the return and can be considerably more.
Not signing Form 593 in time. The form has to be completed and returned to the escrow holder by the close of the transaction to be valid. A late or missing form defaults to the full withholding.
Put 3 1/3% of gross price in your net proceeds model from the first conversation, then have your CPA run the gain-based alternative before escrow closes to see whether it produces a smaller number. Remember that qualifying for an exemption from withholding does not relieve you of filing a California return and paying the actual tax. And keep the two systems separate in your head: withholding is a timing question about your cash at closing; the real tax bill is a separate calculation that includes capital gain and depreciation recapture.
Do I get the withholding back?
It is credited against your California income tax liability when you file. If the withholding exceeded what you owe, the excess comes back as a refund — but you wait until you file, which can be many months after closing.
Is there a separate federal withholding?
There is for foreign sellers, under FIRPTA, at a different rate and with its own certification process. Domestic sellers do not have a federal withholding on the sale — only the California one.
Can my buyer agree to cover it?
No. It is an obligation attached to the seller's proceeds and remitted by the escrow holder. What is negotiable in a transaction is price and cost allocation, not who the FTB withholds from.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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