California Taxes on Home Sale | Avoid Overpaying on Capital Gains
Are you ready to move to greener pastures or out of state from California? Are you wondering about California taxes on home sales? Look no further–in this article, we’ll talk in detail exactly how taxes work on a home sale in California. Please keep in mind that tax laws do vary from state to state.
California Taxes on Home Sale | The Quick Answer
In short, if you sell your home in California you should expect to owe some taxes if your home value has appreciated more than $250,000. An appreciation of value is a concept called Capital Gains, and simply means you sold something for a gain–or you got more money for something than what you originally paid for it. A common example of this is when you sell stocks for a profit.
How does the California capital gains tax work? How much is the tax?
Before we dive into detail about how much tax you may owe, know that it’s possible that you owe no taxes for selling your home in California. This is the case if the home you’re selling is/was:
Owned for 2+ years
Used as your primary residence for 2 out of last 5 years
The capital gain was $250,000 or less
If you meet the above criteria, you will be exempt from taxes on the sale of your home. If you are married or in a Registered Domestic Partnership, the $250,000 exclusion above is doubled to $500,000 and either, not both, you or your partner has to meet the 2 out of 5 rule.
What if the home isn’t your primary residence?
In cases that don’t fall into the above, you most likely owe some taxes if there is a capital gain.
How much taxes do I owe for selling my home in California?
Unlike other states, California does not have a separate Capital Gains tax rate. Instead, capital gains are taxed at the ordinary income tax brackets. This means the sale of a home, or other assets, is just taxed at the regular tax rates as if you received a salary from a job. While this article is focused on California taxes on home sale, keep in mind that any income is also taxed at the Federal level.
If you sell a home in California that doesn’t qualify for the primary residence ⅖ rule, or exceeds the $250,000 exemption, then you will be taxed at the following rates:
| Rate | Single | Married Filing Jointly |
|---|---|---|
| 1% | $0 – $8,932 | $0 – $17,864 |
| 2% | $8,933 – $21,175 | $17,865 – $42,350 |
| 4% | $21,176 – $33,421 | $42,351 – $66,842 |
| 6% | $33,422 – $46,394 | $66,843 – $92,788 |
| 8% | $46,395 – $58,634 | $92,789 – $117,268 |
| 9.30% | $58,635 – $299,508 | $117,269 – $599,016 |
| 10.30% | $299,509 – $359,407 | $599,017 – $718,814 |
California income tax brackets
Addressing Common Tax Misconceptions
A common misconception is that the more money is earned, the higher you are taxed in total. That’s not really true, because tax brackets are marginal. This means that if you make $100,000 you would be in the 9.3% tax bracket, but it doesn’t mean that ALL $100,000 is taxed at 9.3%.
In fact, if you look at the table, you’ll see that the first $0 - $8,932 is taxed at 1%, then from $8,933 - $21,175 that money is taxed at 2%, and so forth. In truth, of the $100,000 you made, only $41,366 is taxed at 9.3% ($100,000 - $58,634), or simply the amount above $58,634, the previous tax bracket.
California Capital Gains Tax | How the Math Works
For example purposes, let’s say you bought a home in Los Angeles 10 years ago for $250,000. You have been living in this home for the last 10 years and are ready to move and sell it. You are able to sell the home for $750,000 and will have to pay taxes on it. Here’s how the math works:
First, because you’ve owned this home for 2 years, and have lived there for at least 2 out of the last 5 years, you qualify for the $250,000 exemption on capital gains. This means that your capital gains will be reduced by $250,000.
Next, let’s calculate how much capital gains was realized:
Capital Gains = Sale Price - Original Cost - Selling Expenses - Improvements
Let’s say you spent $50,000 upgrading your kitchen, floors and bedrooms at some point (known as improvements) and you hired a real estate agent who charges 5% commission on sale price (known as selling expenses) to help you get your house sold. There is also almost always additional selling expenses like escrow fees, title fees, inspection, appraisal, etc., but we’ll keep it simple for this example.
Capital Gains = $750,000 - $250,000 - $37,500 - $50,000 = $412,500
minus your $250,000 exemption
Capital Gains = $412,500 - $250,000 = $162,500
Using our tax bracket table above, you would owe:
$12,241.31 in taxes. When you actually file your taxes, this would be offset by standard deductions and write-offs.
What about short-term vs long-term capital gains in California?
As we mentioned earlier, California does not have a separate capital gains tax rate, unlike the federal rules and other states. This means that there is no distinction between short term and long term capital gains. If you’ve had your home for over 1 year (long-term capital gains) and sold it, it is still taxed at the ordinary tax rates outlined in our table above.
How to avoid Capital Gains tax in California
The best way to avoid paying capital gains tax on a house in California is to take advantage of the $250,000 exemption we discussed above. If you have a house that you’ve used as your primary residence for some time, chances are you can be exempt from $250,000 of capital gains, which is a lot!
Even if you haven’t fully lived in the home for the last 2 out of 5 years, you could still qualify for a partial exemption. If you have a legitimate reason, the state can allow you to take partial exemptions.
Another way to “avoid” capital gains tax is to make sure you are including all of your improvement and selling expenses in your cost basis. These can really add up. For example, if you’ve spent $100,000 to upgrade your home whether that be kitchen cabinets, repainting, a new HVAC system, solar panels, etc. these are all costs that you can “add” onto the cost of your home, which can lower your capital gains significantly.
What about a second home, or investment property that I rent out?
If you have a second home or income property that is rented out, unfortunately you probably will owe capital gains tax on it when you sell. The only exception is to use a 1031 exchange, which is a special type of transaction where you immediately buy another “like-kind” property and defer the capital gains tax until the final sale.
How to file your california taxes on home sale
Now that we’ve covered if you qualify for exemptions, whether you owe any taxes, let’s talk about how you would go about filing your taxes, if you owe any. One thing to keep in mind is that everyone has to file both Federal and State taxes, so your actual taxes will have more details and nuances than what’s covered in this article alone.
Generally, when you file your taxes on the Federal level, those details are carried over to your state tax return. This is done automatically when you use tax software to file your taxes. At 1099 Cafe, we recommend FreeTaxUSA, because it’s low-cost and is just as good as any other tax software (don’t pay more for TurboTax). To file your capital gains in California (assuming you either don’t qualify for the $250k exemption, or exceeded it), use Schedule D540. Don’t worry, this can be done with the click of a button in your tax software. Usually, the software will ask you something like “Do you have capital gains/losses you have to report in 2022?”, you would answer “Yes” and the software would append a Schedule D540 for you.
To actually fill out the form, you would use the details we outline above, but with your actual home values instead of the example. If you sell your home, you should receive something like a “Summary of Closing Costs” schedule which details out all your expenses for selling the home and your final net proceeds as a seller. This will help a lot when it comes to filling out capital gains forms.
What if I inherited property? Do I owe California taxes?
If you inherit property, you don’t immediately owe taxes. Only when you sell the property, do you potentially owe taxes on it. For inherited property, your cost basis is the Fair Market Value of the property at the time it was passed to you.
For example, a family member bought a house in 2001 for $75,000. That family member then gives you that house in 2015, valued at $250,000 at the time. Now, in 2023, you decide to sell that house and it’s worth $500,000. How much taxes do you owe?
In short, you would owe taxes on $500,000 - $250,000 (cost based on time it was given to you) = $250,000 of capital gains. If you qualify for the $250,000 exemption discussed above, you would actually have no capital gain, and therefore owe no taxes.
FAQs:
Do I have to pay taxes on the sale of my house in California?
If you used your home as a primary residence for at least 2 out of the last 5 years, you are exempt from $250,000 of capital gains. Otherwise, you owe taxes on the amount above $250,000 in gains.
How much capital gains tax will I pay if I sell my house in California?
The state of California doesn’t have a specific capital gains tax rate. Instead, the standard state tax rates are used, of which there are nine: 1%, 2%, 4%, 6%, 8%, 9.3%, and 10.3% ranging from 0 - $359,407+. You will pay taxes on the amount you made as a gain, which could be significantly reduced by the $250,000 exemption if used as a primary residence for the last 2 out of 5 years.
How much tax do you pay on selling a house?
If you sell your house and make a profit, you will be taxed at either the short-term capital gains tax rate, or the long-term capital gains tax rate (held > 1 year). Short-term capital gains tax rate is your ordinary tax brackets, while LT capital gains tax rates are: 0%, 15%, and 20% from 0 - $445,851+ in profit. In addition, you may have additional taxes at the state level.
Let Me Help You
If you feel overwhelmed and are looking for help, consider reaching out to me to act as your real estate agent.
Remember that I am here to help—all of the content on 1099cafe.com is freely available and there is no catch.
I’m a license real estate agent, business owner, and resident of Los Angeles. I grew up in Taiwan and am fluent in English and Mandarin. I have 10+ years of experience working in corporate finance and have a passion for helping others with personal finance, budgeting, and finding their dream homes.
As a first-time homebuyer, I know how complicated and intimidating the home buying and selling process can be. I am eager to help and support you throughout this journey. Please reach out at wesleykang@kw.com, or (626) 325-8068 because I would love to connect!
Follow my Real Estate journey on social media. I don’t take social media too seriously.
