FIRPTA and California Withholding: Tax Withholding at Close Explained

Two tax-withholding regimes can quietly remove a meaningful chunk of the seller's proceeds at close: the federal Foreign Investment in Real Property Tax Act (FIRPTA) and California's 3.33% withholding under Revenue and Taxation Code Section 18662. Most owner-occupant sellers qualify for exemptions from both, but the exemption claims happen on specific forms at the signing appointment, and a seller who misses the exemption can pay tens of thousands of dollars in withholding that then takes a tax return to recover. Knowing how each regime works, who is exempt, and how to claim the exemption is part of every signing.

FIRPTA — the federal regime

What it is

The Foreign Investment in Real Property Tax Act (codified at Internal Revenue Code Section 1445) requires withholding of a percentage of the gross sale price when the seller is a "foreign person" disposing of US real property. The withholding ensures the IRS collects on the foreign seller's capital gains tax, since the IRS has limited collection ability against non-US-resident sellers after they leave the country.

Who is a "foreign person" under FIRPTA

• A non-resident alien individual
• A foreign corporation
• A foreign partnership
• A foreign trust
• A foreign estate

FIRPTA does NOT apply to US citizens (regardless of where they live) or to "resident aliens" for tax purposes (generally green card holders or individuals meeting the IRS substantial presence test).

The withholding rate

Default rate: 15% of the gross sale price (not 15% of the gain — 15% of the entire sale price).

Reduced rates for buyer-occupant transactions:

• Sale price $300,000 or less, buyer intends to use as residence: 0% withholding (the property qualifies for exemption).
• Sale price $300,001 - $1,000,000, buyer intends to use as residence: 10% withholding.
• Sale price above $1,000,000, regardless of buyer intent: 15% withholding.

For most SCV resales (typically $700K-$2M), the applicable rate is 10% for sub-$1M sales where buyer occupies, or 15% for higher prices or non-occupant buyer scenarios.

Reduced withholding through Form 8288-B

A foreign seller whose actual federal tax liability on the sale will be less than the default withholding can apply for reduced withholding using IRS Form 8288-B before close. The IRS reviews and issues a withholding certificate authorizing reduced or zero withholding. Processing takes several months, so this strategy requires planning ahead.

Buyer's role — technically the withholding agent

Under FIRPTA, the buyer is technically responsible for withholding and remitting. In practice, escrow handles the withholding through Form 8288 and 8288-A filings. The buyer signs an affidavit certifying the seller's non-foreign status (if seller is a US person) to be relieved of withholding obligation.

The seller's certification

The US citizen or US resident seller signs a FIRPTA Affidavit at close certifying they are not a foreign person. This is the document that establishes FIRPTA does not apply and no withholding is needed.

California's state withholding regime

What it is

California Revenue and Taxation Code Section 18662 imposes withholding on sellers of California real property at the time of sale. Unlike FIRPTA, this applies regardless of the seller's citizenship or residency. Out-of-state US citizens, in-state US citizens, foreign sellers — all are subject to CA withholding unless an exemption applies.

The default withholding rate

3.33% of the gross sale price (1/3 of 10% — the historical basis).

Alternative: the seller may elect the alternative withholding calculation based on the gain × the maximum state tax rate, if that produces a lower withholding amount. This requires the seller to compute and elect on Form 593 at close.

The principal residence exemption — the common case

The most-claimed exemption on Form 593 is the principal residence exemption. It applies when:

• The seller used the property as their principal residence within the meaning of IRC Section 121 (lived in the property as primary residence for at least 2 of the last 5 years).
• The seller certifies this on Form 593 at signing.

This exemption covers the vast majority of typical SCV owner-occupant sellers. The full sale price withholding is avoided.

Other California exemptions on Form 593

• Loss or zero-gain transaction. Seller's adjusted basis equals or exceeds sale price (no taxable gain).
• Total sale price $100,000 or less.
• Involuntary conversion qualifying under IRC Section 1033.
• Like-kind exchange under IRC Section 1031.
• Installment sale (with election to apply withholding only to the principal payments).
• Specific entity-type exemptions (banks, insurance companies, certain qualified entities).

Who CA withholding hits hardest

• Non-resident sellers. Out-of-state owners selling a California rental, vacation, or inherited property.
• Investor sellers. Sales of investment property that doesn't qualify for principal residence exemption.
• Inherited property sellers. Where 2-of-5-year residency cannot be established.
• Foreign sellers. Subject to both FIRPTA federal AND California state withholding.

For a $1,000,000 California sale by a non-resident with no exemption: $33,300 withheld and remitted to FTB at close.

Form 593 — the document that determines withholding

California Form 593 ("Real Estate Withholding Statement") is the document signed by the seller at close that:

• Identifies the seller, buyer, property, and sale price.
• States the seller's claim of exemption (if any) by checking the appropriate box.
• If no exemption, calculates the withholding amount (3.33% of sale price OR alternative calculation).
• Is filed with the Franchise Tax Board within 20 days of close.

The seller signs Form 593 under penalty of perjury. Misrepresenting an exemption claim is a serious matter; sellers uncertain about their status should consult a tax professional before signing.

How Connor walks sellers through the withholding decision

At listing or shortly after, Connor identifies:

1. Is the seller a US citizen, resident alien, or non-resident alien? (FIRPTA threshold.)
2. Did the seller live in the property as principal residence for 2 of last 5 years? (CA principal residence exemption.)
3. Is the property a rental, vacation, investment, or inherited property? (Different exemption options.)
4. Is the seller doing a 1031 like-kind exchange?
5. Are there involuntary conversion or installment sale circumstances?

Based on the seller's situation, Connor flags any complexity early and recommends the seller consult their tax professional before the close. The decisions made on Form 593 and the FIRPTA Affidavit at signing have real tax consequences.

Common scenarios in SCV transactions

Owner-occupant sale, US citizen seller (most common)

• FIRPTA: not applicable; seller signs non-foreign affidavit.
• CA withholding: principal residence exemption claimed on Form 593.
• Net effect: no withholding at close. Standard outcome.

Inherited property sale, beneficiary lives elsewhere

• FIRPTA: typically not applicable if beneficiary is US citizen/resident.
• CA withholding: principal residence exemption typically does NOT apply (beneficiary didn't live there). Other exemptions may — stepped-up basis often means little or no gain on sale, qualifying for loss/zero-gain exemption.
• Connor flags this scenario early; seller should consult tax professional.

Rental property sale, US owner

• FIRPTA: not applicable for US owner.
• CA withholding: principal residence exemption doesn't apply (rental). Loss/zero-gain exemption depends on actual numbers. 1031 exchange option if rolling into another rental property. Without exemption, 3.33% withheld.

Foreign owner sale

• FIRPTA: 10-15% withheld unless reduced via 8288-B.
• CA withholding: 3.33% withheld unless qualifying exemption.
• Combined: 13-18% of gross sale price withheld at close.
• Seller files US and CA tax returns to reconcile actual tax versus withholding; any excess refunded.

Planning ahead

For sellers who will be subject to meaningful withholding, planning options:

• Apply for Form 8288-B FIRPTA reduction well before close. Processing takes several months.
• Compute the alternative CA withholding based on actual gain × maximum CA rate; elect on Form 593 if lower than 3.33%.
• Consider 1031 like-kind exchange for investment property sales rolling into replacement property.
• Verify all basis adjustments (improvements, depreciation) before computing gain.
• Consult tax professional to model expected tax liability versus withholding.

The cash-flow effect

For a seller whose withholding exceeds actual tax liability, the difference is recoverable through filing the tax return, but the cash is unavailable until the refund processes. On a $1,000,000 non-exempt sale with $33,300 CA withholding plus $100,000 FIRPTA withholding (foreign seller scenario), that's $133,300 unavailable for months. Sellers planning the use of proceeds should factor this in.

What escrow does and doesn't do

Escrow's role:

• Prepares and presents Form 593 and the FIRPTA Affidavit at signing.
• Withholds the calculated amount from seller's proceeds if no exemption is claimed.
• Files Form 593 with FTB within 20 days of close.
• Files Forms 8288 / 8288-A with the IRS for FIRPTA withholding.
• Provides the seller with a Form 593 and 8288-A as record of withholding.

What escrow does NOT do:

• Advise the seller on which exemption to claim.
• Determine the seller's tax residency or principal residence status.
• File the seller's tax returns or recover withholding through refund.
• Substitute for a tax professional's advice.

"FIRPTA and California withholding are the line items most sellers don't think about until the signing appointment. For most owner-occupants, the principal residence exemption makes them invisible. For non-occupant, inherited, investor, or foreign sellers, they can be enormous. The fix is identifying the situation at listing, getting tax-professional advice early, and walking into the signing appointment with the right exemption ready — not a surprised seller and a $30,000 deduction from the wire amount." — Connor MacIvor

Connor MacIvor · The Seller's Agent

27+ years in real estate. Sellers only. $17K Fair Fixed Fee. Santa Clarita Valley.
CA DRE #01238257 · SYNC Brokerage