Capital Gains Tax on Home Sales in California

Selling a home in California involves various financial considerations, including capital gains tax. Capital gains tax is levied on the profit realized from the sale of an asset, such as real estate. This article explores the capital gains tax implications for home sellers in California, drawing insights from reputable sources such as the California Franchise Tax Board (FTB), HomeLight, and BHHS California Properties.

Key Facts

Capital Gains Tax: When you sell a property in California, you may be subject to capital gains tax. Capital gains refer to the increase in the assessed value of an asset, such as real estate, that is realized upon its sale. The difference between the sale price and the initial purchase price is the capital gain, which is subject to taxation.
Exclusion for Primary Residence: The IRS allows for an exclusion on capital gains tax for the sale of a primary residence. If you are single, you can exclude up to $250,000 of capital gains from taxation. If you are married and filing jointly, the exclusion increases to $500,000.
Eligibility for Exclusion: To qualify for the capital gains tax exclusion, the property must be considered your primary residence based on the IRS rules. You must have lived in the property for at least two of the last five years, and the two years do not have to be consecutive.
Limitations on Exclusion: The capital gains tax exclusion can only be used once every two years. If you have multiple properties that could be considered a primary residence, you can only sell one tax-free within a two-year period. Additionally, certain circumstances, such as owning the property for less than two years or participating in a like-kind exchange, may render you ineligible for the exclusion.
Property Tax: In addition to capital gains tax, you should also consider the implications of property tax when selling a house in California. Property tax is an ad valorem tax based on the assessed value of the property. California’s property tax system, governed by Proposition 13, limits property tax rates to 1% of the assessed value at the time of purchase, with annual increases limited to 2%.

Understanding Capital Gains Tax

When a property is sold for a price higher than its original purchase price, the difference is considered a capital gain. This gain is subject to taxation by both the state of California and the federal government. The California FTB taxes capital gains as regular income, with rates ranging from 1% to 13.3% based on the taxpayer’s income bracket.

Exclusion for Primary Residence

The Internal Revenue Service (IRS) offers an exclusion for capital gains tax on the sale of a primary residence. For single filers, up to $250,000 of capital gains can be excluded from taxation. For married couples filing jointly, the exclusion increases to $500,000.

Eligibility for Exclusion

To qualify for the capital gains tax exclusion, the property must meet certain criteria:

It must have been the taxpayer’s primary residence for at least two of the last five years.
The two years of residency do not have to be consecutive.
The exclusion can only be used once every two years.

Limitations on Exclusion

There are certain circumstances that may limit or disqualify a taxpayer from claiming the capital gains tax exclusion:

Owning the property for less than two years
Participating in a like-kind exchange (also known as a 1031 exchange) within the last five years
Being subject to an expatriation tax
Not meeting the residency requirement

Property Tax Considerations

In addition to capital gains tax, homeowners in California are also subject to property tax. Property tax is an ad valorem tax based on the assessed value of the property. California’s property tax system, governed by Proposition 13, limits property tax rates to 1% of the assessed value at the time of purchase, with annual increases limited to 2%.

Conclusion

Selling a home in California involves careful consideration of capital gains tax implications. Homeowners who meet the criteria for the primary residence exclusion can significantly reduce their tax liability. However, it is important to consult with a tax professional to ensure accurate calculation and compliance with all applicable laws and regulations.

Sources

FAQs

What is capital gains tax?

Capital gains tax is a tax on the profit realized from the sale of an asset, such as real estate. When a property is sold for a price higher than its original purchase price, the difference is considered a capital gain and is subject to taxation.

What is the capital gains tax rate in California?

The California Franchise Tax Board (FTB) taxes capital gains as regular income, with rates ranging from 1% to 13.3% based on the taxpayer’s income bracket.

Is there an exclusion for capital gains tax on the sale of a primary residence in California?

Yes, the IRS offers an exclusion for capital gains tax on the sale of a primary residence. For single filers, up to $250,000 of capital gains can be excluded from taxation. For married couples filing jointly, the exclusion increases to $500,000.

What are the eligibility requirements for the capital gains tax exclusion?

To qualify for the capital gains tax exclusion, the property must meet certain criteria:

It must have been the taxpayer’s primary residence for at least two of the last five years.
The two years of residency do not have to be consecutive.
The exclusion can only be used once every two years.

Are there any limitations on the capital gains tax exclusion?

Yes, there are certain circumstances that may limit or disqualify a taxpayer from claiming the capital gains tax exclusion:

Owning the property for less than two years
Participating in a like-kind exchange (also known as a 1031 exchange) within the last five years
Being subject to an expatriation tax
Not meeting the residency requirement

What is property tax?

Property tax is an ad valorem tax based on the assessed value of the property. In California, property tax rates are limited to 1% of the assessed value at the time of purchase, with annual increases limited to 2%.

Who is responsible for paying property tax in California?

Property tax is typically paid by the homeowner. However, in some cases, the buyer may be responsible for paying the property tax for the portion of the year after the sale.

How can I reduce my capital gains tax liability when selling a home in California?

There are several strategies that homeowners can use to reduce their capital gains tax liability, such as:

Claiming the primary residence exclusion
Maximizing deductions for home improvements
Selling the property for a lower price
Deferring the sale until a later year when they are in a lower tax bracket