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State of California Franchise Tax Board

Withholding Requirements for Sale of California Real Estate

Real estate withholding is a prepayment of income (or franchise) tax due from sellers or transferors on the gain from the sale of California real property. It is not an additional tax on the sale of real estate.

Withholding is required by the buyer; however, the withholding may be performed by the real estate escrow person (REEP) on the buyer’s behalf.

Real estate withholding is required whenever there is a transfer of title on California real property. Examples are:

  • Sales or transfers of real property (including exchanges and gifts).
  • Leaseholds/options.
  • Short sales.
  • Easements.
  • Personal property sold with real property (if not stated separately).
  • Deferred exchanges.
  • Vacant land.
Date Description
April 2016 Sale or Transfer of a Business of Substantial Portion of Business Assests
December 2015 Publication 1016, Real Estate Withholding Guidelines
Withholding Voluntary Compliance Program
November 2015 New Real Estate Withholding Quick Reference Guide
New California Real Estate Withholding Brochure on Trusts
How to Elect Out of Withholding on Installment Payments Following the Close of Escrow
October  2015 Real Estate Withholding Process Improvements Continue
Withholding and Transfers
California Real Estate Withholding Installment Sales Webinar
May 2015 Real Estate Withholding Process Improvements
Real Estate Withholding Publication Draft Available for Comment
April 2015 Qualified Intermediaries and Real Estate Withholding
March 2015 Real Estate Withholding Involving Multiple Sellers
February 2015 How You Can Ensure Availability of Real Estate Withholding Credits
December 2014 New Brochure - Withholding on California Real Estate Installment Sales
November 2014 Nonwage Withholding Audit Process Available Now
How to Allocate the Trust’s Withholding Credit to its Beneficiaries
October 2014 2015 Real Estate Withholding Forms Available October 31
Withholding When a Trust is on Title
August 2014 Report or Remit Real Estate Withholding on Installment Sales
Our Subscription Services
July 2014 Updates to Withhold at Source Regulations
June 2014 Top Withholding Errors Revised
April 2014 Flash - Updated Withholding at Source Regulations
October 2013 Real Estate Withholding Reminders
August 2013 Withholding Voluntary Compliance Program
February 2013 Withholding Form Changes and Updates
Penalty and Notice Information for Withholding Agents of Real Estate, Nonresident and Backup Withholding
December 2012 Reporting and Remitting Real Estate Withholding on Installment Sales
October 2012 Updating Tax Year 2013 Withholding Form to Resolve Balancing Issues
September 2012 No Close of Escrow Date May Trigger a Penalty

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An installment sale is a sale of property where you receive at least one payment after the tax year of the sale.

Withholding requirements

We require buyers to withhold on the principal portion received in escrow and each installment payment made to the seller when buying California real estate on an installment basis. Statute requires withholding on each installment payment to match the withholding credit to the income the seller reports on their income tax return.

We do not require withholding:

  • If other exemptions apply, see Form 593-C, Real Estate Withholding Certificate.
  • On the installment payments interest portion.

How to calculate installment payment withholding

You can calculate the withholding amount with either the Total Sales Price Method or using the Optional Gain on Sale Election certified on Form 593, Real Estate Withholding Tax Statement.

Total Sales Price Method

Withhold 3-1/3 percent on each installment payment’s principal portion.

Example 1: Initial payment due during escrow

  • Total sales price is $300,000.
  • Down payment $150,000.
  • Withhold $4,995 ($150,000 x .0333 = $4,995).
  • Remit $4,995 at close of escrow to us.

Example 2: Subsequent payments after escrow

  • Monthly principal payments are $2,000.
  • Withhold $67 ($2,000 x .0333 = $66.60).
  • Remit $67 to us.
  • Send the seller $1,933 ($2,000 - $67) plus interest.

Withholding Amount Using Optional Gain on Sale Election

Withhold the Optional Gain on Sale withholding percent on each installment payment’s principal portion.

Example: Subsequent payments after escrow

  • A non-Californian partnership has a withholding rate of 12.3%.
  • The non-Californian partnership pays the seller $1,500 monthly principal payments.
  • The withholding is $185 ($1,500 x 0.123 = $184.50).
  • Remit $185 to us.
  • The seller receives $1,315 ($1,500 - $184.50) principal payment plus interest

Withholding rates:

  • 12.3 percent for individuals, trusts and non-California partnerships
  • 8.84 percent for corporations
  • 10.84 percent for banks and financial corporations
  • 13.8 percent for S corporations
  • 15.8 percent for financial S corporations

Buyer information

During escrow

  • Complete and sign Form 593-I, Real Estate Withholding Installment Sale Acknowledgement.
  • Calculate the withholding amount with the Form 593 instructions.
  • Withhold on the required first installment payment you receive in escrow.
  • Submit to the Real Estate Escrow Person (REEP):
    • Form 593-I.
    • Copy of the promissory note.
    • Amount you withheld. The REEP sends it to us.

Form 593-I must include:

  • Principal amount.
  • Installment amount.
  • Interest rate.
  • The repayment period’s length.

After escrow

Continue to withhold on all subsequent installment payments. Before you send the seller each payment, you must:

  • Calculate the withholding amount with the Form 593 instructions.
  • Send it to us with Form 593 and Form 593-V, Payment Voucher for Real Estate Withholding, by the 20th day of the month that follows the month you pay the installment.
  • Send the seller a copy of Form 593 by the 20th day of the month that follows the month you pay the installment.

If sending your last installment payment, write “Final Installment Payment” on the bottom of Form 593.

Write to us any time the following items change:

  • Installment sale’s or promissory notes terms
  • Payment schedule.

Real Estate Escrow Persons information

Mail us:

  • The complete, original, Form 593-I.
  • A copy of the promissory note.
  • The seller’s or transferor’s certified Form 593.
  • Form 593-V with first installment payment’s withholding amount.

After the buyer sends you the:

  • Form 593-I
  • Promissory note
  • Amount withheld

The Real Estate Escrow Person must keep copies of these forms in their records.

Seller information

  • File the appropriate California tax return.
  • Report the installment sale income.
  • Claim the related withholding credit in each taxable year that you receive installment payments.

Elect out of subsequent installment payment withholding

Sellers or transferors can elect to not report the sale on the installment method. If you choose not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. To do this, you must:

  • File a California tax return and report the entire gain on Schedule D-1, Sale of Business Property.
  • Submit to us a written request to release the buyer from withholding on subsequent installment payments after filing your tax return and reporting the entire gain.
  • We approve or deny the request within 30 days from when we receive it. The buyer must continue to withhold until we approve the request.

See FTB 4010, Withholding on California Real Estate Installment Sales, for additional information.

See the table below for available methods to calculate withholding.

Withholding Method Description Example
Total sales price method - a withholding of 3-1/3% of the total sales price. To calculate withholding using the Total Sales Price method, multiply the total sales price by 3-1/3%. (.0333)
  • Total sale price: $200,000
  • Seller’s ownership percentage: 50%
  • $200,000 x 50% x .0333 = $3,330
Alternative withholding calculation method - withholding on gain of the sale amount by the percentage that applies to you. To calculate withholding using the Alternative Withholding Calculation method, also known as the Optional Gain on Sale Election method, multiply the estimated gain by the seller’s or transferor’s maximum tax rate.

Withholding rates:
  • 12.3 percent for individuals, trusts, and non-California partnerships
  • 8.84 percent for corporations
  • 10.84 percent for banks and financial corporations
  • 13.8 percent for S corporations
  • 15.8 percent for financial S corporations
  • Gain on sale: $100,000
  • Seller’s ownership percentage: 100%
  • Withholding for individual seller assuming a maximum tax rate of: 12.3%
  • $100,000 x 100% x 12.3% =  $12,300

Real estate withholding is required on a trust unless the trust can qualify for an exemption on Form 593-C.

There are two types of trusts; a grantor and a non-grantor trust.

A grantor trust is a trust where the grantor (the person who transferred property into the trust) retains the right to cancel or revoke the trust. For tax purposes, a grantor trust is disregarded and the grantor (usually an individual) must report a real estate sale and claim the withholding on their individual tax return. Typically family trusts and living trusts are grantor trusts.

Withholding is required on a grantor trust unless the grantor qualifies for an exemption. Complete Form 593 using the individual's (grantor’) information.

A non-grantor trust is an entity separate from the grantor for all tax purposes. The seller is the trust and withholding is required. Complete Form 593 using the name of the trust and the trust's FEIN. Do not use the trustee’s individual information.

If the trust distributes the income from the gain on the sale of real estate, the trust must file Form 592, Resident and Nonresident Withholding Statement, to allocate the related withholding credit to the beneficiary.

Withholding Forms

  • Form 593 – Real Estate Withholding Tax Statement
  • Form 593 Booklet – Real Estate Withholding Booklet
  • Forms 593-C and 593-E with instructions – Real Estate Withholding Certificate and Computation of Estimated Gain or Loss
  • Form 593-I – Real Estate Withholding Installment Sale Acknowledgement
  • Form 593-V – Payment Voucher for Real Estate Withholding

Electronic Options

Tools

  • FTB 761RE – Top Ten Real Estate withholding Errors
  • FTB 936 – Nonwage Withholding Audit Process
  • FTB 1023R – Real Estate Withholding Electronic Submission Requirements
  • FTB 1150 – Withholding at Source Penalty Information
  • FTB 4010 – Withholding on California Real Estate Installment Sales
  • FTB 4098 – Withholding Information Notice
  • FTB 4827 – Withholding Voluntary Compliance Program Application
    • Exhibit A - Withholding Liability Calculation Sample
  • FTB 7429 – Do I need to Withhold on This Trust?
  • FTB 7429 LLC – Real Estate Withholding Sales by Limited Liability

Publications

  • FTB Pub. 923 – SWIFT Guide for Resident, Nonresident, and Real Estate Withholding
  • FTB Pub. 1016 – Real Estate Withholding Guidelines

Webinars

To view our prerecorded webinars, you must register for each webinar separately.

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