Capital Gains Tax On Selling A House In California
Steps to Understand Capital Gains Tax on Selling a House in California
When selling a home in California, profits may be taxed as ordinary income, with rates up to 13.3%. However, if the home is your primary residence, you may exclude up to $250,000 (single) or $500,000 (married) in gains—provided you’ve lived there at least 2 of the past 5 years.
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Step 1: Determine If You’ll Owe Capital Gains Tax
Step 1A: Calculate Your Capital Gain
Capital Gain = Sale Price – (Purchase Price + Improvements + Selling Costs)
Step 1B: Determine If It's a Primary Residence or Investment Property
Primary Residence may qualify for a $250K (single) or $500K (married) tax exclusion.
Investment Property doesn’t qualify for this exclusion.
Cash Buyer Option: Quick closings can lock in gains during a rising market or avoid changes in tax law.
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Step 2: Understand the Exclusion Rules (Primary Residences Only)
To exclude up to $250K/$500K in capital gains, you must:
Own and live in the home for at least 2 out of the last 5 years
Not have claimed this exclusion in the last 2 years
If you qualify, the excluded amount is not taxable.
Cash Buyer Benefit: Sell fast and secure your exclusion before any change in living or tax status.
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Step 3: Know the Types of Capital Gains Taxes
Federal Capital Gains Tax:
Short-term (owned < 1 year): Taxed as ordinary income (up to 37%) Long-term (owned > 1 year): 0%, 15%, or 20% based on income
California State Capital Gains Tax:
No special rate — taxed as ordinary income (1% to 13.3%)
Other Costs:
NIIT (Net Investment Income Tax) of 3.8% for high earners
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Step 4: Consider Selling Options Based on Your Tax Goals
Option 1: Sell to a Cash Buyer (Fast & Tax-Smart)
No delays — ideal if you’re timing the sale for tax year advantages.
Great for investment properties where a fast sale avoids market volatility or holding costs.
Reduces risk of tenant complications, delays, or deductions on FSBO/MLS closings.
Option 2: 1031 Exchange (Investment Property Only)
Defer capital gains tax by reinvesting in another like-kind property.
Must identify new property within 45 days and close within 180 days.
Option 3: Installment Sale
Receive payments over time and spread out tax liability.
May not work with all cash buyers — often better with investor buyers.
Option 4: Traditional MLS Sale
More exposure, but longer closing times.
More likely to include contingencies, inspections, and agent fees.
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Step 5: Track Improvements and Selling Costs for Deductions
Keep records of:
Major home improvements (not maintenance)
Real estate commissions
Title, escrow, or advertising costs
These lower your taxable gain — cash buyers often waive many costs, making recordkeeping easier.
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Step 6: Estimate Your Tax Liability
Use IRS Schedule D and CA Form 540.
Work with a CPA or real estate-savvy tax professional.
Don’t forget depreciation recapture (on rentals) if applicable.
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Step 7: File Proper Tax Forms After the Sale
Federal: Report the sale on IRS Form 8949 & Schedule D
California: Report on Form 540 (or 540NR for non-residents)
Cash sales are often simpler because:
No lender or mortgage payoff delays
Escrow documents are streamlined
Title companies usually provide final summaries for easy tax reporting