How to Complete Form 593 When Selling an Inherited California Home

When you sell an inherited California home, the escrow company presents you with FTB Form 593 — the California Real Estate Withholding Statement — and tells you that if you do not certify an exemption, they will withhold 3.33% of the gross sale price from your proceeds and send it to the Franchise Tax Board. On a $900,000 home, that is $29,970 locked in escrow. Then they hand you a form with multiple checkboxes and tell you they cannot advise you which one applies.

This is not a niche problem. FTB phone representatives have given conflicting guidance on which exemption applies to inherited property — in documented cases, two different FTB agents called within 30 minutes of each other gave opposite answers about the correct box. The reason is that the statutory language in California Revenue and Taxation Code Section 18662 is genuinely ambiguous in a way that creates real-world confusion.

Here is what actually applies when selling an inherited California home, and how to complete Form 593 correctly.

What Form 593 Is and Why Escrow Cannot Close Without It

Form 593 (Real Estate Withholding Statement) is California's mechanism for collecting income tax at the point of a real estate sale. The state requires the title company or escrow agent to withhold 3.33% of the gross sale price and remit it to the FTB unless the seller certifies one of the statutory exemptions under California Revenue and Taxation Code Section 18662(e).

The withholding is not a penalty — it is a pre-payment of estimated tax on any capital gain. But when the inherited property's cost basis has been stepped up to the date-of-death fair market value, there may be no capital gain at all, making the withholding an unnecessary seizure of funds that takes months to recover through a tax refund.

The title company will not advise you which exemption to choose because doing so constitutes tax advice, which they are legally prohibited from providing. The escrow officer presents the form, explains what it is, and stops there. The seller — meaning you, the executor or heir — must determine the correct exemption and sign under penalty of perjury.

The Core Exemptions Available on Form 593

Form 593 has several exemption checkboxes. For inherited property, the relevant ones are:

For most inherited California home sales, one of the first two exemptions applies — and understanding which one requires knowing how the step-up in basis works.

How the Step-Up in Basis Changes Your Tax Position

When you inherit a California home, federal law under IRC Section 1014 steps up the cost basis of the property to its fair market value on the date of death. The original purchase price the decedent paid in 1978 or 1993 becomes irrelevant.

Example:

• Decedent purchased the home in 1989 for $195,000
• Date-of-death fair market value (documented by the probate referee in the Inventory and Appraisal, or by an independent appraisal): $875,000
• New cost basis for the heir: $875,000
• Sale price six months after death: $910,000
• Capital gain: $35,000
• California tax on $35,000 at the top rate: approximately $4,480

In this scenario, the withholding would be 3.33% of $910,000 = $30,303. But the actual tax owed is roughly $4,480. The withholding dramatically overpays the eventual liability, and the balance would not be refunded until the annual fiduciary or personal income tax return is processed — typically six months to a year later.

If the sale price were $875,000 or less, the capital gain would be zero (or negative), and the zero-gain exemption on Form 593 would eliminate the withholding entirely.

For California community property, the double step-up under IRC Section 1014(b)(6) means the surviving spouse inherits a stepped-up basis on the entire property — both halves — not just the decedent's share. This doubles the baseline for calculating gain on sale.

Completing Form 593 for an Inherited Property: Step by Step

Step 1: Identify who the seller is. If the home was held in a revocable living trust and is now being sold by the successor trustee, the "seller" for Form 593 purposes is the trust. The EIN for the trust is used, not the decedent's Social Security Number.

If the home went through probate and is being sold by the estate, the "seller" is the estate and the estate's EIN is used.

If title was transferred to an heir before the sale, the heir is the seller and their Social Security Number is used.

Step 2: Document the date-of-death fair market value. The stepped-up basis equals the property's fair market value on the date of death. Acceptable documentation includes:

• The Inventory and Appraisal (Forms DE-160 and DE-161) prepared by the court-appointed probate referee if the estate went through probate
• An independent licensed appraisal performed close to the date of death
• The county assessor's supplemental assessment reflecting the date-of-death value

This document is your evidence that supports the zero-gain exemption if the sale price is at or below date-of-death value.

Step 3: Calculate the capital gain. Sale price minus the stepped-up basis equals capital gain. If the result is zero or negative, the zero-gain exemption on Form 593 applies.

Step 4: Apply the principal residence exemption if the decedent qualifies. Under IRC Section 121, if the decedent owned and used the home as their primary residence for at least two of the five years immediately before the date of death, the estate may be able to exclude up to $250,000 of capital gain from the sale price. If the sale occurs within two years of the death, the exclusion is available. This can eliminate the withholding even when there is a modest capital gain above the stepped-up basis.

Step 5: Sign and submit to escrow. Form 593 must be signed and submitted to the escrow officer before the close of escrow. The escrow officer then files the form with the FTB and releases your proceeds without withholding if an exemption is certified.

The Common Mistakes That Lock Up Your Money

Mistake 1: Using the decedent's Social Security Number. After death, the estate or trust must use its own EIN on all tax forms including Form 593. Using the decedent's SSN will result in processing errors and delays in releasing withheld funds.

Mistake 2: Failing to document the stepped-up basis. Checking the zero-gain exemption without documentation to support the claimed basis creates audit exposure. Retain the probate referee's appraisal, the independent appraisal, or the county assessor's supplemental assessment as part of the estate file.

Mistake 3: Assuming the personal residence exemption does not apply. Many executors do not claim the IRC Section 121 exclusion for a decedent's primary residence because they assume it only applies to living sellers. The estate can claim the exclusion if the decedent met the two-year use requirement, and the sale occurs within two years of the death.

Mistake 4: Allowing the default withholding to proceed and waiting for a refund. If no exemption is certified, 3.33% of the gross proceeds goes to the FTB immediately at closing. The refund process requires filing a California return (either the estate's Form 541 or the beneficiary's Form 540), which typically takes months. On a large sale, that is tens of thousands of dollars unavailable to the estate during that period.

Who This Situation Affects Most

• Executors selling a probate estate's real property who have never encountered Form 593 and are facing a title company deadline
• Successor trustees selling trust-held real property who need to use the trust's EIN and understand which exemption applies to trust sales
• Surviving spouses who are selling the marital home after the spouse's death and want to claim the double step-up on community property to certify zero gain
• Adult children who inherited a California home, moved in to satisfy the Proposition 19 occupancy requirement, and are now selling the property after establishing their own cost basis at the date-of-death value
• Out-of-state heirs who inherited California real property and are selling remotely, handling all documentation through an escrow company that cannot advise them

Tradeoffs: When Professional Help Is Worth It

For sales where the capital gain is unclear, where the property was held in a complex trust structure, or where the seller is uncertain whether the IRC Section 121 exclusion applies to the estate, consulting a California CPA before signing Form 593 is worth the cost of a single hour at $175. The form is signed under penalty of perjury, and certifying an exemption that does not apply creates liability.

For straightforward sales — particularly where the probate referee's appraisal documents a date-of-death fair market value close to the sale price — the zero-gain exemption is often clear and certifiable without professional assistance.

Frequently Asked Questions

Can the escrow company or title company tell me which box to check on Form 593?

No. Title companies and escrow officers are legally prohibited from providing tax advice. They will hand you the form and explain what it is, but they cannot advise on which exemption applies to your specific situation. This is the seller's responsibility.

What happens if I certify the wrong exemption on Form 593?

The form is signed under penalty of perjury. Certifying an exemption that does not apply — particularly the zero-gain exemption when a capital gain exists — creates potential FTB penalties and interest on underpaid tax. If there is any uncertainty about whether an exemption applies, consult a CPA before signing.

How is the stepped-up basis documented for Form 593 purposes?

The FTB accepts several forms of documentation: a court-appointed probate referee's appraisal (Forms DE-160/DE-161), an independent licensed real estate appraisal performed near the date of death, or the county assessor's supplemental tax assessment that reflects the date-of-death value. The documentation should be retained in the estate file and available if the FTB questions the basis.

What if the withholding has already been taken from my proceeds?

If 3.33% was withheld at closing, it will appear on a Form 593 that the escrow officer issues to you and files with the FTB. You recover the overpayment by claiming the withholding as a credit on the estate's California fiduciary return (Form 541) or on the beneficiary's personal return (Form 540). The refund is processed with the annual return, typically taking several months.

Does the community property double step-up affect Form 593?

Yes, significantly. If the inherited property was community property (not Joint Tenancy), the surviving spouse inherits a cost basis equal to 100% of the date-of-death fair market value — not 50%. This means the capital gain on a subsequent sale is calculated from a higher baseline, often resulting in zero or minimal gain. This is the zero-gain exemption scenario, and it applies specifically because California is a community property state. Joint Tenancy does not get this benefit.

Can I use the IRC Section 121 exclusion for the decedent's primary residence if I'm the executor?

Yes, in most cases. The IRC Section 121 exclusion allows up to $250,000 in capital gain to be excluded from tax if the decedent owned and used the property as their primary residence for at least two of the five years before death, and the sale occurs within two years of the date of death. The estate or trust selling on behalf of the decedent can claim this exclusion. The Form 593 exemption based on this exclusion eliminates the withholding if the gain after applying the exclusion is zero.

The California Final Tax & Estate Tax Guide includes a dedicated Form 593 Escrow Cheat Sheet that walks through exactly which exemption box applies to inherited property, how to document the stepped-up basis, and what to do if withholding has already been taken at closing.

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