“I’m going to be selling my rental and buying another using a 1031 exchange. A realtor told me that because it’s not my home, the state of California will withhold money from the sale for taxes. Is that correct?”
That agent gave you some incorrect advice.
The state will require a 3 1/3% withholding UNLESS one of the following apply:
- You state that you’re selling your principal residence
- You’re selling for loss or zero gain
- You’re doing a 1031 exchange
So as you can see, you’re exempt under #3.
Note: I’m not a tax professional, so please verify with your favorite tax advisor.