Installment Sale California Rules: FTB, Withholding, Moving Away
Yes, you can use an installment sale in California, and California follows the installment method: you report the gain as the payments arrive. But California changes three things that matter a lot on a big sale: it taxes all of the gain as ordinary income, it withholds on the down payment and on the principal of every later payment, and it keeps taxing the gain on California real estate even after you move away.
This page covers only what is different about installment sales in California. For how the installment method works in general, start with the installment sale guide.
California taxes all gain as ordinary income
The federal return has special rates for long-term gain (0%, 15%, 20%) and a 25% ceiling on the building-depreciation layer. California has none of that. The FTB says it plainly: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." (FTB capital gains page)
- Rates run up to 12.3% under the regular schedule (R&TC §17041).
- Plus 1% on taxable income over $1,000,000 (R&TC §17043). That line is not doubled for a joint return.
- For 2025, married filing jointly, the top brackets are 9.3% up to $742,958 of taxable income, 10.3% up to $891,542, 11.3% up to $1,485,906, and 12.3% above, plus the 1% over $1 million.
That is why spreading the gain helps more in California than in most states. A lump-sum sale piles the whole gain into one year and into the top brackets and the 1% surcharge. An installment sale puts a smaller slice into each year.
Simple example (not a real client): a California married couple with a $3 million gain and no other income that year. Federal and California tax only, 2026 federal brackets and 2025 California brackets held flat, standard deductions ($32,200 federal, $11,412 California), no depreciation layer and no note interest.
| Simple example ($3M gain, CA couple) | Federal | 3.8% NIIT | California | Total | Share of gain |
|---|---|---|---|---|---|
| All in one year | $548,040 | $104,500 | $349,155 | $1,001,695 | 33.4% |
| $300,000 a year for 10 years | $253,350 | $19,000 | $197,160 | $469,510 | 15.7% |
| $200,000 a year for 15 years | $155,025 | $0 | $156,240 | $311,265 | 10.4% |
The California column alone falls from about $349,000 to about $156,000 when the same gain is spread over 15 years (simple example). Real returns have other income stacked on top, so your own numbers will be smaller. Run them in the calculator with your state set to California.
Withholding at closing and on every later payment (Form 593)
California requires withholding on sales of California real property, reported on FTB Form 593.
At closing: on an installment sale, generally 3 1/3% of the down payment, unless you elect a withholding amount based on the gain.
On an installment sale, it keeps going. The Form 593 instructions require withholding "on the principal portion of all payments made following the close," with each one reported on a new Form 593 by the 20th of the following month (R&TC §18662), unless the FTB has issued an approval letter for the elect-out method. A buyer who is required to withhold and fails to faces a penalty of the greater of 10% or $500 (R&TC §18668).
Simple example: a $2,000,000 sale with $400,000 down and a $1,600,000 note paid in ten level principal payments of $160,000.
| Payment | Principal | Withholding at 3 1/3% |
|---|---|---|
| Cash at closing | $400,000 | $13,333 |
| Each later principal payment | $160,000 | $5,333 |
Withholding is a prepayment, not an extra tax. You claim it as a credit on your California return. But it is cash out of each payment, so plan for it.
Seller financing: the buyer makes the payments, so the buyer (or a servicer) handles the withholding on each payment. Put that duty in the note and the escrow instructions.
Structured installment sale: in a structured sale, the buyer pays in full at closing, and the obligation to pay you over time is assigned to an assignment company, usually funded by a fixed annuity it owns (some programs use a funding agreement instead). The buyer is released at closing, and the FTB has not said who files Form 593 when an assignment company makes the payments. Settle in the contract, before closing, who withholds, who files, and how you get credit. You are an unsecured creditor of the assignment company, the schedule is locked, a commission is built into the pricing, and no IRS ruling specifically approves the structure; see structured installment sale for the full picture.
Moving out of state does not end California tax on the gain
This is the question California sellers ask most. The answer is no.
The FTB's position in Pub. 1100 is that "California taxes the installment proceeds received by a nonresident to the extent the income from the sale was from a California source," and "California taxes real property based upon where the property is located." Its own example is a seller of a California rental on installments: the capital gain is taxable by California in each later year, while "the interest income is not taxable by California and has a source in your state of residence." (FTB Pub. 1100)
The statutes behind it: a nonresident's California income "includes only the gross income from sources within this state" (R&TC §17951), and income from intangibles is sourced to the owner's residence unless it has a California business situs (R&TC §17952). Real property is sourced where it sits.
| Item after you move to a no-tax state | Taxed by California? |
|---|---|
| Gain in each payment from a California building | Yes |
| Interest on the note | No (follows your new residence) |
| Gain on out-of-state real property you sold while a CA resident | No |
| Gain on stock or other intangibles you sold while a CA resident | Yes |
Two more move-out traps:
- Your suspended passive losses are restated. When you move, the FTB restates your suspended passive losses as if you had been a nonresident for all prior years, keeping only California-source items (Pub. 1100). Out-of-state partnership losses stop sheltering the California gain.
- Other states can go further. New York can accelerate unpaid installment gain when a resident leaves unless a bond or other acceptable security is filed (IT-260 instructions), and Massachusetts has its own rules for installment sales of $1 million or more. If you are moving from another state, not from California, check its rule before you sell.
Nonconformity: bonus depreciation and the California basis gap
California does not follow federal bonus depreciation: "Section 168(k) of the Internal Revenue Code ... shall not apply" (R&TC §17250(a)(11)). So a cost segregation study with 100% bonus gives you a huge federal deduction and a much smaller, slower California one.
That creates two sets of books:
- Federal: lower basis, bigger gain, bigger year-one recapture on the fast parts.
- California: higher basis, smaller gain, and depreciation that arrived later.
On the California return the installment sale is reported on FTB 3805E, with California's own basis, gain and gross profit ratio. Differences in gain flow through California Schedule D-1 and Schedule D (540). Your CPA needs both depreciation schedules before modeling the note.
California also does not follow the federal real estate professional rule: "Section 469(c)(7) ... shall not apply" (R&TC §17561(a)). Every rental is passive on the California return, even for someone who qualifies federally. A federal pro can have an empty federal passive-loss bank and a full California one, and the note's gain can meet those California losses.
One more 2024 to 2026 rule: California allows no NOL deduction in those years unless net business income or modified AGI is under $1,000,000 (R&TC §17276.24). A big installment year can switch off an NOL carryover on the California return.
Why boot in California can cost about 42 cents on the dollar
For a top-bracket Californian, here are the ceilings on one dollar of gain:
| Layer | Federal | NIIT | California | Ceiling |
|---|---|---|---|---|
| Building depreciation (unrecaptured §1250) | 25% | 3.8% | 13.3% | 42.1% |
| Plain long-term gain | 20% | 3.8% | 13.3% | 37.1% |
| Cost-seg ordinary recapture (§1245 / §1250(a)), due in year one | 37% | 3.8% | 13.3% | 54.1% |
These are ceilings. The 13.3% needs more than $1 million of California taxable income in that year; below that, the building layer is about 41.1% or less, and spread over years the California piece is often 9.3% to 11.3%. Cost-seg recapture is taxed in the year of sale no matter how you are paid (§453(i)); see installment sale depreciation recapture.
Why does boot so often land on the 42-cent layer? On an installment note, unrecaptured §1250 gain comes out of the payments first (Reg. §1.453-12). On cash boot in a 1031, the Schedule D worksheet generally treats the recognized gain as unrecaptured §1250 gain first too. Take $500,000 of 1031 boot as cash in one high-income year and much of it can land near that ceiling. Spread it on a note and each slice lands lower. See 1031 boot.
And if your 1031 moves money out of California, the deferred California gain follows you: you file FTB 3840 every year until it is taxed (R&TC §18032).
Other California planning points
- Real estate professional status does not help on the California return. See real estate professional status for the federal rule.
- Married in California? Community property gets a full step-up on both halves at the first spouse's death (§1014(b)(6)). An installment note gets no step-up. For an older couple, holding may beat selling.
- Real estate sales in general: see installment sale of real estate.
New York has its own nonresident withholding form; see Form IT-2663 and installment sales.
For other states and moving after a sale, see installment sale state taxes when you move.
Bottom line
California follows the installment method, but it taxes every dollar of gain as ordinary income, withholds on the principal of each payment, keeps its own depreciation and passive-loss books, and taxes gain on California property after you move. Those are reasons to spread the gain, and reasons to plan the paperwork before closing. Run a separate California column for every year of the note.
Questions to ask your CPA
- What is my California basis and gain, compared with federal, after California's bonus and §179 differences?
- How much will be withheld on Form 593 at closing and on each later payment, and should I elect a gain-based amount?
- If the note is a structured sale, who will file Form 593 on each payment, and how do I get credit?
- If I move out of state during the note, what stays taxable in California, and what happens to my California suspended losses?
- Does a large installment year affect my California NOLs under R&TC §17276.24?
- How does the note's gain fall across California's brackets and the 1% line each year?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.