California withholding and FIRPTA when your building sells

When a California building sells, escrow holds back 3 1/3 percent of the total sales price for the Franchise Tax Board, unless you certify an exemption or elect the alternative calculation on Form 593. That money is a prepayment of your California income tax, and a seller who is a foreign person also has 15 percent of the amount realized withheld for the IRS under FIRPTA.

Neither one is a closing cost. California's withholding is your own income tax paid early, and the paperwork for both has to be settled before the deed records.

How much does California withhold from a sale?

The 2026 instructions for Form 593 set the standard withholding at 3 1/3 percent, written as .0333, of the total sales price. On a made-up $3,000,000 sale that is $99,900, whatever your gain and however much of the price goes to pay off your loan. Escrow calculates it, holds it and sends it to the Franchise Tax Board.

The Franchise Tax Board calls real estate withholding a prepayment of the income tax due on the sale. You claim it by filing a California return for the year of the sale and entering the amount withheld from your Form 593, and the tax on your return decides whether you owe more or get some back. Timing matters here. Once the sale has closed, withholding can be recovered only as a credit on that return, so an exemption you could have certified in escrow waits until you file.

Can the withholding be based on your gain instead?

You can elect the Alternative Withholding Calculation on Form 593 instead. It multiplies your estimated gain, worked out in Part VI of the form, by the tax rate for the filing type you select on the form. Escrow then withholds that amount in place of 3 1/3 percent of the price.

The election pays off when your gain is small next to your price. If your estimated gain times your rate comes to less than 3 1/3 percent of the price, the alternative withholds less, and if it comes to more, the standard rate is the smaller figure. The estimate starts from your adjusted basis, the same figure behind the gain on an apartment building sale, so pull your purchase papers and depreciation schedules before escrow opens.

Which sales are exempt?

An exemption means no withholding at all, and you certify it on Form 593. For an apartment building, these are the ones that come up:

• The sale produces a loss or zero gain for California income tax purposes, meaning the amount realized is no more than your adjusted basis.
• The sale is the first half of a deferred 1031 exchange. Nothing is withheld at that closing, and the intermediary withholds later if you receive more than $1,500 in money or other property, or if the exchange does not take place or does not qualify.
• The seller is a corporation, or an LLC classified as a corporation, that is qualified through the California Secretary of State or has a permanent place of business in California.
• The seller is a California partnership or a partnership qualified to do business in California, including an LLC classified as a partnership. A single-member LLC that is disregarded for federal and California income tax does not qualify as one.
• You last used the property as your principal residence under IRC section 121, read without its two-year period. If you live in one unit, that reaches only your unit's share of the sale, and the instructions have you split the sale the way you split it for depreciation.

Part IV of the form lists partial exemptions as well. If an LLC holds title, find out how it is classified for tax before escrow opens, because the partnership exemption covers an LLC taxed as a partnership and leaves out a single-member LLC that is disregarded for tax.

What changes if the seller is a foreign person?

Federal withholding applies on top of California's. Under section 1445 of the Internal Revenue Code, the buyer, as withholding agent, withholds 15 percent of the amount realized when a foreign person sells a U.S. real property interest, and sends it to the IRS with Form 8288 by the 20th day after the closing, according to the IRS page on FIRPTA withholding. On a made-up $3,000,000 amount realized, that is $450,000. In escrow, that withholding comes out of the seller's proceeds.

A foreign seller can apply on Form 8288-B for a withholding certificate that reduces or eliminates the withholding. File it on or before the closing date. If the application is still pending when escrow closes, the buyer still withholds, but the Form 8288 instructions let the amount wait until 20 days after the IRS mails the certificate or its denial, so the money sits with the withholding agent instead of going straight to the IRS.

What to hand escrow, and when

1. Your completed Form 593, before closing. The Franchise Tax Board says the seller must submit it before the transaction closes to prevent withholding, and that holds for an exemption and for the alternative calculation alike.
2. A certification of non-foreign status, if you are not a foreign person. Under the IRS exceptions to FIRPTA withholding, you sign it under penalties of perjury, with your name, U.S. taxpayer identification number and home address, or office address for an entity. A valid Form W-9 counts as one.
3. If you are a foreign person applying to reduce FIRPTA withholding, proof that Form 8288-B went to the IRS on or before the closing date.
4. After closing, the copy of Form 593 showing the amount withheld, which goes on your California return.

You can give the certification to the person responsible for closing the sale, such as the title company or an attorney, as long as that person is not your own agent, and that person then gives the buyer a statement, under penalties of perjury, that it holds your certification. The IRS calls this a qualified substitute, and it keeps your taxpayer identification number out of the buyer's hands.

Which box you check on Form 593 is a tax decision, and so is whether a withholding certificate is worth applying for. Shaya can put these forms in front of you in the first week of escrow instead of the last, but he is a real estate agent, not a tax advisor, so make the choice with your CPA.