Selling a home in California. One owner clearly meets the "principal residence" exemption from California withholding (as well as exclusion of up to $250K gain from taxable income) on the sale proceeds per IRC Sec 21 (lived in home as primary residence for at least 2 of the last 5 years).
However, another owner moved out 6 years in the past. They definitely do not qualify for the exclusion of gain per IRC 121, BUT do they still qualify for exemption from California 593 withholding at the time of sale?
CA FTB Guidelines read:
Property Last Used as a Principal Residence
You qualify for a withholding exemption if you last used the property as your principal residence without regard to the two-year time period (for withholding purposes only).
The other owner's last use of the property was definitely as their principal residence -- they did not rent back or otherwise use the home. They did, however, use the CA 593 exemption from withholding and the IRC 121 exclusion of gain on the sale of a different home in the intervening 6 years.
Searches of the web do not provide a clear answer for this scenario. If they do qualify for the withholding exemption, why then does the FTB even bother with detailing the first exemption for a principal residence if used for 2 years within the last 5 years before sale (because that would be subsumed by the exemption, "Last Used as a Principal Residence")?
