Will California Withhold Tax When I Sell My Home and Move Out of State?

Not by itself. The Franchise Tax Board (FTB) says withholding is required when California real estate is sold or transferred. The rule follows the property, not your new address.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. When a family is relocating, this is one of the questions I want answered early, so the number you expect from escrow is the number you actually receive.

The FTB also explains that California taxes real property based on where it is located. A gain on a California home is generally California income, even if you are living in another state when you file.

The FTB's Form 593 instructions give two ways to figure it.

• The standard method. Escrow withholds 3 1/3% of the sales price. On a $1,500,000 sale, that is about $50,000.
• The alternative withholding calculation. You can elect to have withholding figured on your estimated gain instead of the full price. For an individual, the FTB's table uses a rate of 12.3% of that estimated gain. If your estimated gain were $200,000, the withholding would be about $24,600.

The gain-based option often leads to a smaller amount held back, especially for longtime owners with a large basis from improvements. The FTB notes that estimates cannot be used to show a loss when there is actually a gain, and a knowingly false certificate carries a penalty.

The FTB lists situations where withholding is not required. A few that come up often:

• The sales price is $100,000 or less.
• The home qualifies as your principal residence under IRC Section 121. The FTB explains this generally means you owned and lived in the home as your main home for at least two of the five years before the sale.
• The home was last used as your principal residence, even if you don't meet the two-year period. If the last use was as a rental, vacation home or second home, this exemption doesn't apply.
• The sale results in a loss or zero gain for California purposes.

The FTB notes that if only part of the property was your principal residence, the rest may need its own Form 593.

One timing point matters for relocating sellers. If you move out and rent the home before selling, its last use becomes a rental. Talk with your CPA before you sign a lease, because that choice can change which exemptions are open to you.

Escrow does. The FTB calls the escrow company, title company, attorney or anyone else who handles the closing money the "real estate escrow person." Escrow notifies the buyer about the withholding requirement, holds back the amount you choose on Form 593, and sends it to the FTB.

Your part is to complete and sign Form 593 before escrow closes. The FTB states that the form must be submitted before the close of the transaction to prevent withholding. If it arrives late, the money is not refunded through escrow. It can only be recovered as a credit on your tax return.

No. It's a prepayment toward whatever California tax you owe on the sale.

The FTB explains that you claim the amount withheld as a credit when you file your California return. A full-year nonresident or part-year resident generally files Form 540NR. If more was withheld than you owe, the difference can come back to you as part of that return. If less was withheld, you pay the balance.

Federal taxes are a separate question. The IRS says you may be able to exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 for most married couples filing jointly, if you meet the ownership and use tests. Your CPA can tell you how the federal and California rules apply to your numbers.

This article is general information, not tax or legal advice. Please review your plan with a CPA before you list.

If your family is planning a move out of California, I'd love to help you map out the sale, the timing and the people you'll want on your team. Let's start with a private planning conversation. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.