My itemized closing costs for the sale of my rental property lists:
title fee
notary fee
recording fee
title insurance
CA state withholding (the state tax I paid on my gain from the sale)
As far as I understand, the first four are all considered deductible closing costs. What about the state withholding?
The state withholding is prepayment of state income tax, just like the state withholding from your paycheck/ W-2. The withholding at the real estate closing is not the actual state tax due on the capital gain, it is only an estimate.
At tax filing time, you calculate the state tax on all your income, then subtract the withholding to see if you owe more or get a refund.
So, no, the state tax withholding is not a deduction, from the selling price, in determining your capital gain. It is a separate transaction from the real estate sale.
Withholding
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