When farmland sells in California, escrow does something that surprises a lot of families the first time they see it on the closing statement: it holds back 3⅓% of the sale price and sends it to the state before the seller sees a dollar. On a $3 million orchard, that's $100,000 gone from the proceeds at close.
The instinct is to read that as a tax — another bite out of a transition that already carries plenty of them. It isn't. Understanding what it actually is, and the elections that come with it, can change how a sale is structured and how much cash a family walks away with at close.
What the withholding actually is
California requires the escrow company to withhold and remit a portion of the proceeds on most sales of California real property. The standard rate is 3⅓% (0.0333) of the gross sale price — not the gain, the whole price. It's reported on Form 593, the Real Estate Withholding Statement, which escrow completes before closing.
Here's the part that matters: this is a prepayment of the seller's California income tax on the sale, credited against what's actually owed when the family files its California return. If the real tax bill comes in lower than what was withheld, the difference comes back as a refund. If it comes in higher, the balance is due with the return.
So the 3⅓% isn't an additional cost. It's the state collecting some of the tax early, at close, rather than waiting for the return. But — and this is the practical catch — it's calculated on the sale price, while the actual tax is owed on the gain. For farmland held in a family for decades with a low cost basis, those two numbers can be wildly different, and the withholding can substantially over- or under-shoot the real liability.
The state collects 3⅓% of the price. The family owes tax on the gain. For long-held farmland, those are rarely the same number.
The election most sellers never make
Form 593 isn't a single fixed number. The seller can elect an alternative withholding calculation based on the gain actually recognized from the sale, rather than the flat 3⅓% of price.
For an individual, the alternative withholds at California's top 13.3% rate applied to the gain instead of 3⅓% applied to the price. Whether that helps depends entirely on the math of a specific sale:
Which method withholds less?
Recently acquired ground, or a sale at a modest markup over basis — the gain-based calculation can withhold far less than the flat 3⅓%, keeping more cash in the family's hands at close.
Decades-held farmland with a very low basis, where most of the price is gain — the flat 3⅓% of price may actually be the lower number, and the standard method is the better election.
There's no universal right answer, and that's the point. The election has to be run against the real numbers before escrow closes, because after the transaction closes, the withholding can only be recovered by claiming it as a credit on the tax return — there's no going back to change the method. This is a decision with a deadline, and the deadline is the close of escrow.
When no withholding is required at all
Several exemptions remove the withholding entirely. The ones that matter most for farmland:
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A 1031 exchange already underway. If the sale is structured as a like-kind exchange and a qualified intermediary is holding the funds before escrow closes, the withholding generally doesn't apply, because the gain is being deferred rather than recognized. A failed or partial exchange can bring it back — coordination matters here.
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Sales of $100,000 or less. Below that threshold the withholding doesn't apply automatically. Relevant for small parcels and partial-interest transfers, less so for whole-farm sales.
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Certain entity sellers. A California corporation, partnership, or LLC that certifies it will file a California return can be exempt. How the family holds title — individually, in a trust, in an LLC — affects which exemptions are available, which is one more reason title decisions made years earlier shape the sale.
A critical caveat the FTB states plainly: qualifying for a withholding exemption does not relieve anyone of the obligation to file a California return and pay the tax actually owed. An exemption changes the timing — it doesn't erase the liability. A family that claims the 1031 exemption and then later sells the replacement property in a taxable transaction still owes California its share of the deferred gain.
The trade-offs, named plainly
The withholding itself is neutral — money moves earlier, not money lost. But how a family handles it has real consequences.
Four things that actually matter here
Defaulting to the flat 3⅓% when the gain-based calculation would withhold less means the family floats the state an interest-free loan until the refund arrives with next year's return. On a large sale, that's meaningful cash sitting idle for a year.
Form 593 must be submitted before escrow closes to change the method or claim an exemption. Miss that window and the only remedy is waiting for the refund — the flexibility is gone.
The 1031 exemption feels like a win at close, but it's a deferral. The California tax is still owed eventually, and a family that treats the exemption as the end of the story sets up a surprise down the road.
Whether the ground is held individually, in a trust, or in an entity determines which exemptions and elections are even on the table when the sale comes. The planning that helps here happens long before escrow opens.
How we coordinate this
We don't fill out Form 593 — escrow does that, in coordination with your CPA. What we do is make sure the withholding decision isn't made by default at the closing table. Before a sale, we coordinate with your CPA to run the standard 3⅓% against the gain-based alternative on the actual numbers, confirm which exemptions the family's title structure makes available, and make sure the Form 593 election that keeps the most cash in the family's hands is the one that gets filed — before escrow closes, while there's still a choice to make.
It's a small percentage on the closing statement. On a generational farmland sale, it's also six figures of the family's money, and whether it's withheld at the right amount comes down to a decision most people don't know they're allowed to make.
Legacy Land Advisory
Selling farmland, or weighing an exchange, in the next year or two?
The withholding election is one of several decisions that has to be made before escrow closes — not after. We help Central Valley families coordinate the timing so the choices that protect proceeds actually get made while there's still time to make them.
Start the ConversationCommon Questions
California Withholding —
What Families Ask
What is California's 3⅓% withholding — is it a tax I'm paying twice?
No. The 3⅓% withheld by escrow is a prepayment of your California income tax on the sale — not an additional tax. It is credited against your actual California tax liability when you file your return. If the amount withheld exceeds what you actually owe, the difference is refunded. It's the state collecting some of the tax early, at close, rather than waiting until the following April.
Can I reduce the amount withheld by using a different Form 593 calculation?
Yes — but the election must be made before escrow closes. Form 593 allows an alternative calculation: California's 13.3% top rate applied to the gain recognized, rather than the flat 3⅓% of the gross sale price. Whether the gain-based method withholds less than the flat-rate method depends on the ratio of gain to price on your specific sale. Your CPA needs to run the comparison against your actual numbers before escrow closes.
Is withholding required on a 1031 exchange?
Generally no — if the sale is properly structured as a like-kind exchange with a qualified intermediary holding the proceeds before escrow closes, the withholding does not apply because the gain is being deferred. A failed or partial exchange (where some cash is received as boot) can make withholding applicable on that portion. The 1031 exemption defers the California tax; it does not eliminate it. The obligation remains and follows the deferred gain into the replacement property.
What if escrow withholds the flat 3⅓% and I think the gain-based amount would have been less?
Once escrow closes, the withholding method cannot be changed. The only way to recover excess withholding is to claim the full withheld amount as a credit on your California tax return and receive the difference as a refund — typically arriving several months after the close of the tax year. On a large sale, that can mean six figures sitting with the state for a year. The time to make the election is before close, not after.
Does the withholding exemption apply to farmland held in an LLC or trust?
It depends on the specific entity type and how it is structured. A California corporation, partnership, or LLC that certifies it will file a California return may qualify for an exemption from withholding. Trusts and individual sellers face different rules. The title structure that was put in place years before the sale — whether land is held personally, in a revocable trust, in a family LLC, or otherwise — determines which exemptions and elections are available at the time of closing. This is one reason title and estate structure decisions have downstream consequences that extend all the way to the closing statement.
Important Disclosures
This article is educational and does not constitute tax, legal, or investment advice. California real estate withholding rules and individual circumstances vary, and the right Form 593 election depends on the specific numbers of a given sale. Coordinate with a qualified tax professional and your escrow or settlement agent regarding Form 593 and your specific situation.
Regulatory Disclosure: Avidity Capital Inc. is a California state-registered investment adviser (CRD# 312745). Registration does not imply a certain level of skill or training. For firm background information, visit adviserinfo.sec.gov/firm/summary/312745.
No Commission Disclosure: Avidity Capital Inc. is compensated solely by advisory fees paid directly by clients. The firm does not receive commissions, referral fees, or revenue-sharing payments from sponsors, issuers, or product providers.