Understanding Withholdings on California Real Estate Sales

Since January 1, 2003, California law requires the buyer (transferee) to withhold 3⅓% of the gross sale price from the seller's proceeds on dispositions of California real property — by both residents and non-residents. The withholding does not take into account costs of sale such as commissions or settlement costs. The Franchise Tax Board's Withholding Services and Compliance Section administers the program.

Key exemptions apply: no withholding is required if the sale price is less than $100,000, if the seller is selling their principal residence, or if the seller is selling at a loss. Tax-deferred 1031 exchanges and involuntary conversions are also exempt. The seller must sign a statement under penalty of perjury to establish eligibility for any exemption. Corporations and other entities may apply for reduced withholding or waivers, but individuals cannot.

If there are multiple sellers on title and the total purchase price exceeds $100,000, each owner is considered separately — withholding is calculated on each owner's pro-rata share of proceeds. It is possible for the transaction to be exempt for one seller but not for others. Principal residence qualification generally follows IRC Section 121: the seller must have owned and lived in the property for two of the previous five years (which may be non-consecutive periods).

The escrow holder is required to provide notice of withholding requirements to all parties but cannot make legal determinations about exemptions. The escrow agent may withhold and remit to the FTB on the buyer's behalf if the parties agree, for a fee not exceeding $45. Withholding is due by the 20th of the calendar month following transfer. The seller recovers excess withholding only by filing a California state income tax return for the year of sale.

If the property is held in a revocable trust, withholding rules apply as if the individual who can revoke the trust is the seller. For irrevocable trusts, the trust itself is the seller and withholding may apply. All real estate interests are covered — fee title, easements, and other interests. Team Goeglein at Fidelity National Title ensures withholding requirements are clearly communicated on every South Bay transaction.