Selling California Real Estate After Moving Out of State: Tax Rules for Nonresidents
Moving out of California does not by itself end California income tax exposure on real estate that remains in the state. If you move to Texas, Florida, Nevada, or another state and later sell a California home, rental property, or investment property, the taxable gain generally remains California source income because the real estate is located in California.
The transaction may also be subject to California real estate withholding through Form 593. That withholding is important at closing, but it is not the same as the actual California income tax owed on the sale. Understanding the difference can help prevent unnecessary withholding, unexpected tax balances, and problems claiming the withholding credit when the California return is filed.
Key Tax Issues for a Nonresident Selling California Real Estate
- Moving out of California generally does not change the California source of gain from California real estate.
- Form 593 withholding generally applies to covered real estate sales with a sales price exceeding $100,000 unless an exemption applies.
- The standard Form 593 method is based on sales price rather than taxable gain.
- An individual seller may elect an alternative withholding calculation based on estimated recognized gain.
- A former personal residence may still qualify for the Section 121 home sale exclusion after the owner moves away.
- Rental depreciation can create taxable gain even when other gain qualifies for the Section 121 exclusion.
- Installment sales can create California reporting and withholding obligations for several years.
- A Section 1031 exchange can defer gain, but California has additional reporting requirements when California property is exchanged for property outside California.
- Form 593 withholding is a tax payment credited against the final California tax liability. It does not determine the final tax.
California Can Tax the Gain Even After You Move
California taxes nonresidents on income from California sources. California regulations specifically provide that gain from the sale or transfer of real property located in California is California source income regardless of where the sale is completed.
As a result, changing residency before the sale does not convert gain from California real estate into income sourced to the seller's new state. For example, a taxpayer who moves from California to Texas and later sells a California rental property generally continues to have California source gain from that sale.
For a nonresident, California determines the applicable income tax rate using the taxpayer's total taxable income as though the taxpayer were a California resident and then applies that rate to California taxable income. Other income can therefore affect the California tax rate even when that other income is not itself taxable by California.
California also does not provide a preferential state income tax rate for long term capital gains. Taxable capital gain is included in the California income tax calculation using the applicable individual income tax rates.
What Is California Form 593?
Form 593, Real Estate Withholding Statement, is used in connection with California real estate withholding. For an individual seller whose transaction is otherwise subject to the withholding rules, withholding generally applies when the sales price exceeds $100,000 unless a statutory exemption applies.
The withholding system is designed to collect a payment toward the seller's California income tax. It is not a separate real estate tax, and it is not the final calculation of the California income tax attributable to the sale.
The amount withheld is credited against the seller's California income tax liability when the return is filed. If the withholding exceeds the final tax liability, the excess can be refunded. If the withholding is less than the final liability, additional tax may be due.
The Sales Price Method for Form 593 Withholding
The standard California real estate withholding calculation is 3 1/3 percent of the sales price attributable to the seller.
The statutory term is sales price. It is broader than simply the cash a seller receives at closing. For withholding purposes, sales price can include cash, the fair market value of other property received, and liabilities assumed by the buyer or to which the property remains subject.
For example, assume an individual owns 100 percent of a California property and sells it for $1,000,000. Using the .0333 factor on Form 593, the standard withholding calculation is approximately $33,300.
The potential problem is that sales price and taxable gain can be very different. A seller might have a $1,000,000 sales price but only $150,000 of estimated recognized gain after adjusted basis, selling costs, and other allowable adjustments.
For this reason, Form 593 should be reviewed before escrow closes rather than automatically accepting withholding based on the sales price method.
The Alternative Gain Based Withholding Method
California permits a seller to elect an alternative withholding calculation based on estimated recognized gain. For an individual, the 2026 Form 593 uses a rate of 12.3 percent against the estimated gain.
Using the previous example, if the estimated recognized gain is $150,000, the alternative withholding calculation would be $18,450 rather than approximately $33,300 under the sales price method.
The difference can be significant when a property has a high sales price but a relatively high adjusted basis.
The alternative calculation requires support for the property's basis, capital improvements, depreciation, selling expenses, ownership percentage, suspended passive activity losses directly related to the property, and other items that affect the estimated recognized gain. The seller certifies the election on Form 593 under penalty of perjury.
If the Form 593 computation establishes that the transaction produces a loss or zero gain, the seller may qualify for an exemption from withholding.
Withholding Is Not Your Final California Tax Liability
This distinction is critical. Form 593 withholding is a tax payment. It is not a determination of the final California income tax liability.
A seller could have $30,000 withheld and ultimately owe only $18,000 of California tax. The excess would generally be available as a refund after the California return is filed.
The opposite can also occur. The alternative Form 593 rate of 12.3 percent for an individual is not necessarily a ceiling on the seller's final California tax liability. California imposes an additional 1 percent Behavioral Health Services Tax when the applicable taxable income exceeds $1,000,000. Other items on the return can also affect the final calculation.
The Form 593 calculation should therefore be coordinated with an actual California tax projection rather than treated as the final tax calculation.
Former California Homes Converted to Rental Property
A common situation involves a homeowner who moves out of California, rents the former home, and later sells the property while living in another state.
Converting the property to a rental does not automatically eliminate the Section 121 home sale exclusion. In general, a taxpayer who owned and used the property as a principal residence for at least two years during the five year period ending on the sale date may qualify to exclude up to $250,000 of gain. Certain married taxpayers filing jointly may qualify for an exclusion of up to $500,000.
For example, a taxpayer who lived in a California home for several years, moved to another state, rented the California home for two years, and then sold it may still satisfy the ownership and use requirements.
There is another important rule for rental use after moving out. For purposes of the Section 121 nonqualified use rules, the portion of the five year testing period after the taxpayer's final use of the property as a principal residence generally is not treated as nonqualified use. Therefore, renting the property after moving out does not by itself cause a proportional reduction of the Section 121 exclusion. The taxpayer must still satisfy the separate two out of five year ownership and use requirements.
Rental or other nonprincipal residence use before the property became the taxpayer's principal residence can produce a different result under the nonqualified use rules.
Depreciation creates a separate limitation. Gain attributable to depreciation adjustments for periods after May 6, 1997 generally cannot be excluded under Section 121.
California generally follows Section 121 for this purpose. As a result, a former California residence can produce both excluded gain and taxable California source gain in the same transaction.
Form 593 and a Former Principal Residence
The income tax calculation and the Form 593 withholding analysis are separate.
California law provides a withholding exemption when the property qualifies as the seller's principal residence within the meaning of Section 121. Form 593 also provides a separate certification when the last use of the property was as the seller's principal residence.
If a taxpayer moved out and then rented the property, the property's last use before sale was rental use, so the separate last use certification generally would not apply. However, the taxpayer may still qualify for the Section 121 principal residence certification if the Section 121 requirements are otherwise satisfied.
This creates an important practical result. A seller can potentially qualify for a Form 593 withholding exemption while still having taxable gain attributable to depreciation. No withholding does not necessarily mean no California tax.
Depreciation and the Taxable Gain
For rental and investment property, adjusted basis is not simply the original purchase price.
Federal tax law generally requires basis to be reduced for depreciation allowed or allowable. Form 593 likewise requires the seller to account for California depreciation that was deducted or could have been deducted under the applicable depreciation method when estimating gain.
A property purchased for $500,000 and later sold for $900,000 therefore does not necessarily have a $400,000 taxable gain. Capital improvements, acquisition costs, selling expenses, land allocation, depreciation, and other basis adjustments can materially change the result.
The phrase depreciation recapture is often used broadly, but the federal rules are more precise. Section 1250 ordinary income recapture generally applies to additional depreciation in excess of straight line depreciation. Residential rental real estate subject to the current federal depreciation system is generally depreciated using the straight line method.
As a result, for many residential rental properties the federal depreciation related gain is generally treated as unrecaptured Section 1250 gain rather than ordinary Section 1250 recapture. Unrecaptured Section 1250 gain is subject to a maximum federal capital gain rate of 25 percent.
California does not use the federal preferential capital gain rate structure. California taxable capital gains are taxed using the applicable California individual income tax rates.
Installment Sales After Leaving California
Moving away from California does not eliminate California taxation of installment gain attributable to a sale of California real estate.
Under the installment method, a portion of each qualifying principal payment generally carries taxable gain based on the transaction's gross profit percentage. When the underlying property sold was California real estate, that gain generally remains California source income when recognized after the seller becomes a nonresident.
Interest on the installment obligation is analyzed separately. For a nonresident individual, income from a note or other intangible property generally is not California source income unless the intangible has acquired a California business situs or another California sourcing rule applies.
California real estate withholding also has special installment sale rules. The withholding provisions are applied separately to each principal payment. Under the sales price method, withholding is generally 3 1/3 percent of the principal portion of the payment. Interest is not included in that principal withholding calculation.
The alternative withholding method works differently. Form 593 first determines an installment sale withholding percentage by dividing estimated gain by sales price. That percentage is applied to the installment payment, and the resulting estimated gain portion is then multiplied by the applicable withholding tax rate.
An installment sale can therefore create continuing California tax return and withholding obligations for several years after the seller leaves California.
What Happens With a Section 1031 Exchange?
A properly structured Section 1031 exchange can defer recognition of gain when qualifying real property held for investment or productive use in a trade or business is exchanged for qualifying like kind real property.
For California real estate withholding purposes, a qualifying Section 1031 exchange can qualify for an exemption from Form 593 withholding to the extent the gain is not required to be recognized.
If the seller receives cash or other consideration that causes gain to be recognized, withholding can apply to the recognized portion. A failed deferred exchange can also create a California withholding obligation.
When California property is exchanged for replacement property located outside California and California source gain remains deferred, California generally requires Form FTB 3840. The form is required for the year of the exchange and for each subsequent taxable year while the California source gain or loss remains unrecognized.
California also has developing rules concerning the sourcing of deferred California real estate gains after an exchange. Those issues, including proposed Regulation section 17951 7, are addressed separately in the related article on California deferred real estate gains for nonresidents.
Will You Need to Make an Estimated California Tax Payment?
Form 593 withholding may be enough to cover the seller's final California tax, but that should not be assumed.
California's estimated tax rules apply to nonresident individuals. In general, the analysis considers the expected California tax liability, withholding and other credits, prior year tax, current year tax, and special rules applicable to higher income taxpayers.
For 2026, an individual generally must consider estimated payments when the expected California tax remaining after withholding and credits is at least $500 and the applicable safe harbor has not otherwise been satisfied. Special rules modify the prior year safe harbor for higher income taxpayers, and taxpayers with California adjusted gross income of at least $1,000,000 generally cannot rely on the prior year tax safe harbor.
The 2026 rules also provide an exception for a nonresident or new California resident who had no California tax liability for 2025.
Because a large real estate sale can occur late in the year, the annualized income method may also be relevant when determining whether an estimated tax underpayment exists.
California Return Filing After the Sale
A nonresident with taxable California source income may be required to file California Form 540NR depending on the applicable California filing requirements.
The return determines the actual California tax attributable to the seller's California taxable income and claims the Form 593 withholding credit. A seller seeking a refund of excess Form 593 withholding will need to file the appropriate California return to claim that credit and refund.
The seller should retain the final Form 593 and verify that the withholding is reported using the correct taxpayer identification number.
A Form 593 withholding exemption does not by itself establish that no California income tax return is required. Likewise, having tax withheld does not eliminate the need to report a taxable sale when a California filing requirement exists.
What to Review Before Escrow Closes
- Confirm the seller's California residency and move date.
- Determine the property's original tax basis and any later basis adjustments.
- Identify capital improvements and acquisition costs that increased basis.
- Calculate depreciation allowed or allowable during rental or business use.
- Determine whether the Section 121 home sale exclusion applies.
- Determine whether any period of nonqualified use affects the Section 121 exclusion.
- Calculate the expected federal and California recognized gain.
- Compare the Form 593 sales price method with the alternative gain based method.
- Determine whether an installment sale or Section 1031 exchange changes the withholding and reporting requirements.
- Estimate the final California tax and determine whether additional estimated payments are required.
- Retain the final Form 593 so the withholding credit can be matched to the California return.
Final Takeaway
Moving out of California does not remove California's ability to tax gain from California real estate. For most nonresident sellers, the planning opportunity is not changing the source of the gain. It is making certain the gain is calculated correctly, available exclusions and deferral provisions are considered, Form 593 withholding is calculated appropriately, and sufficient tax has been paid.
The analysis becomes particularly important for former residences converted to rentals, properties with substantial depreciation, highly appreciated investment property, installment sales, and Section 1031 exchanges.
Selling California real estate after moving out of state?
A review before escrow closes can help determine the expected California tax, the appropriate Form 593 withholding method, and the filing requirements after the sale.
