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Will California hold back tax from my short sale?

It might. California law requires escrow to hold back 3 and one third percent of the total sales price on most real estate sales, and short sales are included. You may avoid it if the home was your main home, or if you can show a loss on Form 593 before escrow closes. Foreclosures and deeds in lieu are exempt.

By Guillermo Serafin, broker and owner of Serve First Realty. Updated October 2026.

What is California real estate withholding?

When California real estate changes hands, the buyer must hold back part of the price and send it to the Franchise Tax Board, or FTB. Escrow usually does this for the buyer. The amount is generally 3 and one third percent of the total sales price.

This is not an extra tax. The FTB calls it a prepayment of the income tax you may owe on any gain. You claim it as a credit when you file your California return.

Why is it a surprise in a short sale?

In a short sale, the seller often gets no cash at closing. Many sellers assume that means nothing can be withheld. But the FTB lists short sales as sales that require withholding. And it says a short sale does not qualify for the loss exemption just because you get no cash or the home sells for less than it is worth. You must actually figure a loss or zero gain.

When is withholding not required?

  • The total sales price is 100,000 dollars or less.
  • The property is sold at a foreclosure sale under a deed of trust or by court order.
  • The lender takes a deed in lieu of foreclosure.
  • You certify an exemption on Form 593, Part III, before escrow closes.

Which Form 593 exemptions fit a short sale?

  • Principal residence. You owned the home at least two years and lived in it as your main home for any two years during the five years before the sale. Shorter time may still count if you sold because of a job change, health reasons, or events like death, divorce, or job loss.
  • Last used as your main home. If the property was last used as your main home, you may qualify for this withholding exemption even without the two-year rule. This is for withholding only. Any gain may still be taxable.
  • Loss or zero gain. You must figure the loss on Form 593, Part VI. A loss or zero gain means your adjusted basis is equal to or more than the selling price minus selling costs.

A rental or second home generally does not count as a main home, though property once rented may still qualify if it meets the rules.

What is my short sale withholding checklist?

  • Ask the escrow company about withholding as soon as escrow opens.
  • Decide which exemption, if any, fits you.
  • Gather your purchase papers and improvement records to show your basis. See our tax time checklist.
  • Fill out, sign, and return Form 593 to escrow before closing. If escrow does not have it in time, withholding is required.
  • Sign only what is true. Knowingly signing a false exemption can bring a penalty of 1,000 dollars or 20 percent of the required withholding, whichever is more.
  • Make sure you have a valid taxpayer ID number, such as a Social Security number or ITIN. Without one, the exemption is void.
  • Keep your copy of Form 593. Whoever sends in the withholding, usually escrow, must give you a copy by the 20th day of the month after escrow closes.

Is there another way to figure the amount?

Yes. Instead of 3 and one third percent of the price, you may choose the Alternative Withholding Calculation Method. It uses your estimated gain on Form 593, Part VI, times a maximum tax rate. Escrow cannot give tax advice, so the FTB suggests talking with a tax professional about this choice.

How do I get withheld money back?

  • File a California income tax return to report the sale and claim the withholding.
  • If more was withheld than you owe, the FTB refunds the extra after it processes your return.
  • California does not give early refunds of real estate withholding.
  • To check that your credit was applied, log in to MyFTB or call FTB withholding services at 888-792-4900.

Withholding is only one tax issue in a short sale. Forgiven debt may also be taxable. See the 2026 tax guide and our short sale seller's guide.

General information, not tax or legal advice. We are not tax professionals. Sources: California Franchise Tax Board Publication 1016, Real Estate Withholding Guidelines (Rev. 02-2026); FTB Form 593; California Revenue and Taxation Code section 18662.

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