California 593 vs New York IT-2663: Price-Based vs Gain-Based Withholding on the Same $1M Sale
California and New York both make out-of-state sellers prepay tax at closing, but they measure it completely differently. California Form 593 withholds 3.33% of the gross sales price — so on a $1,000,000 sale it takes $33,300 no matter how small your gain is. New York Form IT-2663 instead taxes only your gain at the state's highest rate (10.9%) — so on a $150,000 gain it takes only $16,350. That single design difference is why a low-gain, high-price sale is far cheaper to close in New York, and why California's price method can lock up cash you never actually profited from.
The two systems aren't comparing the same thing
Most sellers assume "state withholding" means one tax measured one way. It doesn't. The two largest states by real-estate value use opposite mechanics:
- California (Form 593) — the default is a flat 3 1/3% (3.33%) of the total sales price, withheld at close of escrow. It ignores your gain entirely unless you affirmatively elect the alternative gain-based calculation in Part VI of the form. Source: California Franchise Tax Board — Real estate withholding and the 2025 Form 593 Instructions.
- New York (Form IT-2663) — the seller must compute the gain (amount realized minus adjusted basis minus selling expenses) and multiply it by the highest New York State personal income tax rate, currently 10.9%. There is no price-based fallback. Source: the official Instructions for Form IT-2663 (IT-2663-I) and the 2025 NY tax tables confirming the 10.9% top rate.
So California taxes the size of the deal; New York taxes the size of the profit. On a high-priced property with a thin gain, those produce wildly different numbers — and the rest of this guide proves it with identical figures.
The setup. Priya is a Florida resident who owns two rental condos she's never lived in. Each is now under contract for exactly $1,000,000. Her tax basis (purchase price plus capitalized improvements, net of depreciation) and selling costs leave her with a recognized gain of exactly $150,000 on each. One condo is in California; one is in New York. Same price, same gain — only the state differs.
California condo — Form 593, default price method:
Step 1. Identify the total sales price entered in Part IV of Form 593 → $1,000,000.
Step 2. Apply the standard rate of 3 1/3% (3.33%) → $1,000,000 × 3.33% = $33,300.
Result. Escrow withholds $33,300 and remits it to the FTB. Priya's $150,000 gain played no role in that number.
New York condo — Form IT-2663, gain method:
Step 1. Complete the Worksheet for Part 2: sale price − selling expenses − adjusted basis = recognized gain → $150,000.
Step 2. Multiply the gain by the highest NYS rate, 10.9% → $150,000 × 10.9% = $16,350.
Result. Priya must remit $16,350 with Form IT-2663 to the county recording officer when the deed is recorded.
The gap. Same $1,000,000 deal, same $150,000 profit — yet California holds $33,300 and New York holds $16,350. California ties up $16,950 more of Priya's cash at closing, none of which reflects extra tax actually owed. It's a timing and cash-flow penalty, not a higher final bill.
Side-by-side on the identical $1M / $150K sale
| Item | California (Form 593) | New York (Form IT-2663) |
|---|---|---|
| What's measured | Gross sales price | Recognized gain |
| Default rate | 3.33% of price | 10.9% of gain (top NYS rate) |
| Sales price | $1,000,000 | $1,000,000 |
| Gain | $150,000 (ignored by default) | $150,000 |
| Amount withheld / prepaid | $33,300 | $16,350 |
| Withholding as % of gain | 22.2% | 10.9% |
| When & how paid | Withheld by escrow at close | Paid by seller to county recorder at deed recording |
The "withholding as % of gain" row is the one to sit with. California's $33,300 equals 22.2% of Priya's actual profit — far more than her real combined tax on the gain will likely be. New York's $16,350 lands right at the gain's top statutory rate. California overshoots not because its tax is higher, but because its measuring stick (price) is detached from profit.
Why a low-gain sale is cheaper to be held in New York
New York's mechanic is self-correcting on thin-margin deals: less profit means a smaller multiplicand, so the prepayment shrinks proportionally. If Priya's New York gain had been only $40,000, IT-2663 would have held just $40,000 × 10.9% = $4,360. If she'd sold at a loss, Tax Law §663 lets her remit $0 — she marks box 4A on Part 3 and pays nothing, because there's no gain to tax.
California offers no such automatic relief under the default. A $1,000,000 sale at a loss still triggers the full $33,300 price-based withholding unless the seller proactively does one of two things on Form 593:
- Claim a Part III exemption (e.g., the property qualified as a principal residence under IRC §121, or the sale is at a net loss for California purposes — there's a specific certification box for that), or
- Elect the Part VI alternative gain-based calculation, which lets an individual seller withhold 12.3% of the actual gain instead of 3.33% of price.
This is the single most overlooked move on the form. The Part VI election exists precisely to rescue low-gain sellers from the price method — but it's opt-in, and many escrow officers default to the simpler 3.33% box unless the seller insists.
Priya elects Part VI on the California condo. Instead of the default 3.33%, she elects the alternative gain-based calculation for an individual: $150,000 gain × 12.3% = $18,450. That's higher than New York's $16,350 (California's top individual rate is steeper than New York's top rate), but it's $14,850 less than the $33,300 the price method would have grabbed. For a low-gain, high-price seller, electing Part VI nearly halves the cash locked up at closing.
Why a high-price, low-gain sale is punished by California's price method
The price method's flaw scales with the gap between price and profit. Picture three California sellers, each closing at $1,000,000:
| Seller's gain | CA default (3.33% of $1M) | Withholding as % of gain | CA Part VI election (12.3% of gain) |
|---|---|---|---|
| $500,000 | $33,300 | 6.7% | $61,500 |
| $150,000 | $33,300 | 22.2% | $18,450 |
| $40,000 | $33,300 | 83.3% | $4,920 |
Notice the default column never moves — it's stuck at $33,300 because it's a function of price, not profit. The "% of gain" column explodes as the gain shrinks: a seller with only a $40,000 gain has 83.3% of their entire profit withheld up front. That seller should almost always elect Part VI (dropping the hold to $4,920). Conversely, the high-gain seller ($500,000 profit) is better off leaving the default alone — the price method's $33,300 is far below the gain-based $61,500. The rule of thumb: low gain → elect the gain method; high gain → keep the price method.
New York avoids this entire decision tree because it only ever measures gain. There's no scenario where a New York nonresident overpays relative to the gain-based result, because gain-based is the only method.
How each method affects cash at closing and the eventual refund
Withholding is a prepayment, not a final tax in either state. Whatever exceeds your actual state liability comes back as a refund — but only after you file that state's nonresident return for the year, and only after you've waited out the processing cycle. So the real cost of over-withholding is the time value of the trapped cash, plus the friction of having to file a return in a state you don't live in to get it back.
- California: Priya's default $33,300 sits with the FTB. Her actual California tax on a $150,000 nonresident gain will likely be well under that, so she files Form 540NR after year-end to claim a sizeable refund. The bigger the price-vs-gain gap, the bigger the refund she's chasing — and the longer her money is idle.
- New York: the IT-2663 instructions are explicit that the $16,350 prepayment is credited on her New York return (Form IT-203) and that "estimated tax payments made with Form IT-2663 cannot be refunded prior to the filing of an income tax return." Because the prepayment was already calibrated to her gain at the top rate, her refund is usually modest — she over-prepaid only to the extent her actual marginal rate is below 10.9%.
- California measures price; New York measures gain. Same $1M / $150K sale → CA default holds $33,300 (3.33% of price), NY holds $16,350 (10.9% of gain).
- Low-gain, high-price sales are penalized in California under the default — a $40,000 gain still triggers $33,300, i.e. 83% of the profit.
- New York self-corrects: smaller gain → smaller prepayment; a loss means $0 owed under Tax Law §663 (mark box 4A).
- Form 593 Part VI is the escape hatch. An individual can elect 12.3% of gain instead of 3.33% of price — slash it whenever your gain is small relative to price.
- It's a cash-flow issue, not a final-tax issue. Over-withholding is refunded only after you file the state nonresident return; the cost is the trapped cash, not extra tax.
- Always confirm current rates and form line numbers against the official FTB and NY DTF pages before closing — rates and surcharges change by legislative session.
What to do before you close
If you're an out-of-state or foreign seller, decide your California method before escrow funds, because the 3.33% default is what officers will apply unless you hand them a completed Part VI election or a Part III exemption certification. In New York, gather your basis and selling-expense documentation early so the IT-2663 worksheet (and your gain figure) is accurate when the deed is recorded — an inflated gain there directly inflates your 10.9% prepayment. And remember this state withholding is separate from federal FIRPTA withholding if you're a foreign person; the two stack.
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Frequently asked questions
Is California's 3.33% withholding the actual tax I owe?
No. It's a prepayment of your California income tax on the sale, withheld at close of escrow. Your real California tax is based on your gain (taxed at your nonresident rate), and anything withheld above that is refunded after you file Form 540NR for the year. The 3.33% of price is just the default collection mechanism — see the FTB real estate withholding page.
Why does New York withhold less than California on the same sale?
Because New York measures your gain, not your price. On a $1,000,000 sale with a $150,000 gain, New York applies 10.9% to the $150,000 ($16,350), while California applies 3.33% to the full $1,000,000 ($33,300) by default. New York's number tracks your actual profit; California's tracks deal size, which is larger when your margin is thin.
Can I lower the California withholding if my gain is small?
Yes. On Form 593 you can elect the Part VI alternative gain-based calculation — an individual withholds 12.3% of the gain instead of 3.33% of the price. On a $150,000 gain that's $18,450 versus $33,300. You can also claim a Part III exemption (such as a net loss or principal-residence sale). Both must be done on the form before escrow remits, per the 2025 Form 593 instructions.
What rate does New York use on Form IT-2663?
The highest New York State personal income tax rate for the year, which is currently 10.9% (applied to the recognized gain). The IT-2663 instructions require using the top statutory rate, and the 2025 NY tax tables confirm 10.9% as the top bracket.
What if I sell a New York property at a loss?
You owe no IT-2663 prepayment. The worksheet for Part 2 produces a loss (line 17 is zero or negative), so you mark box 4A in Part 3 and remit $0 — Tax Law §663 only requires prepayment on a gain. You may still need to file a New York nonresident return to report the transaction.
Does state withholding replace federal FIRPTA withholding?
No — for a foreign seller they stack. FIRPTA is a federal withholding (generally 15% of the amount realized) collected by the buyer under IRC §1445, and it's entirely separate from California's Form 593 or New York's IT-2663 state withholding. A foreign person selling in either state can face both at the same closing.