Capital Gains Tax On Selling A House In California

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Capital Gains On Home Sale In California

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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

Frequently Asked Questions & Answers

You can sell your home and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married, filing jointly. This exemption applies to the sale of your primary residence home, not the sale of your secondary or investment residence.

In the 2022 or 2023 tax year, if you have a long-term capital gain – meaning you held the asset for more than a year – you’ll owe either 0 percent, 15 percent or 20 percent.

If you have taxable income of $41,675 or less for single filers or $83,350 or under for married couples filing jointly, you may qualify for the 0% long-term capital gains rate for 2022. This means that you would not have to pay any taxes on your capital gains, which can be a great incentive to invest your money. Keep in mind, however, that this rate may change, so be sure to check with a tax professional to see if you qualify.

Gains from the sale of investments must be reinvested within 180 days of the day they are recognized as taxable income to avoid paying taxes on that income.

The over-55 home sale exemption was a tax law that provided homeowners over age 55 with a one-time tax-free capital gains exclusion. Individuals who met the requirements could exclude up to $125,000 of capital gains on the sale of their residences. The over-55 home sale exemption has not been in effect since 1997.

Do not have to report the sale of the home if all of the following apply:
-Your gain from the sale was less than $250,000
-You have not used the exclusion in the last 2 years
-You owned and occupied the home for at least 2 years

You don’t have to pay capital gains tax on your investment until you sell it! The tax you pay covers the amount of profit you made between the purchase price and sale price of the stock, real estate, or other assets.

The 2-out-of-5-year rule is a guideline that states you must have both owned and lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don’t have to be consecutive, and you don’t have to live there on the date of the sale. This rule gives you some flexibility when it comes time to sell your home..”

If you’re a married couple with a joint income of over $450,000, your capital gains tax rate will increase from 15% to 20%. So if you’re the spouse earning less income and have capital gains or dividends, it might make sense to file married filing separately.

Quickly figure out how much capital gains tax you’ll pay – when selling your asset, take the selling price and subtract its original cost and associated expenses (like legal fees, transfer taxes, etc.). The remaining amount is your capital gain (or loss). If this number is a positive number, you will owe taxes on the gain. The rate of tax will depend on your income and how long you’ve owned the asset.
If this number is a negative number, you may be able to deduct the loss from your income when filing your taxes.