Capital Gains Tax on Selling a House in California: What You Owe
When you sell a house in California for more than you paid for it, you may owe capital gains tax on the profit. California taxes capital gains as ordinary income at rates up to 13.3 percent, on top of federal capital gains tax of 0 to 20 percent. However, most primary residence sellers qualify for exclusions that eliminate or reduce their tax. Here is the full breakdown.
Cost Breakdown
| Item | Traditional | With Acquily |
|---|
| Federal Capital Gains Tax (Long-Term) | 0% / 15% / 20% | Same |
| Federal Capital Gains Tax (Short-Term) | 10% – 37% | Same |
| California State Capital Gains Tax | 1% – 13.3% | Same |
| Net Investment Income Tax | 3.8% | Same |
| Primary Residence Exclusion | Up to $250K/$500K | Same |
The Primary Residence Exclusion
Most homeowners who sell their primary residence will owe zero capital gains tax thanks to the Section 121 exclusion. If you have lived in your home as your primary residence for at least 2 of the last 5 years, you can exclude up to $250,000 in capital gains (single filers) or $500,000 (married filing jointly).
For example, if you bought your home for $400,000 and sell it for $600,000, your capital gain is $200,000. As a single filer, this is entirely excluded from tax. As a married couple, you would owe zero tax on gains up to $500,000.
When You Do Owe Capital Gains Tax
You will likely owe capital gains tax if you are selling an investment property, a rental property, an inherited property (above the stepped-up basis), or a home you have owned for less than 2 years. In these cases, both federal and California state capital gains taxes apply.
California does not have a separate capital gains tax rate. Instead, capital gains are taxed as ordinary income, which means they are subject to California's progressive income tax rates of 1 percent to 13.3 percent. Combined with federal tax, total capital gains tax in California can reach 33 percent or more for high earners.
Reducing Your Capital Gains Tax
You can reduce your taxable gain by increasing your cost basis. Your cost basis includes the original purchase price plus the cost of any capital improvements you made to the property (new roof, kitchen remodel, additions). Keep records of all improvements. Selling costs like agent commissions and closing costs also reduce your taxable gain.
When you sell to Acquily with zero closing costs and zero commissions, your taxable gain may be slightly higher than if you paid those costs traditionally. However, the money you save on fees typically exceeds any additional tax owed. Consult a tax professional for your specific situation.
Frequently Asked Questions
How much is capital gains tax in California?
California taxes capital gains as ordinary income at rates from 1 to 13.3 percent, depending on your total income. Combined with federal capital gains tax of 0 to 20 percent, total tax can reach 33 percent or more. Most primary residence sellers qualify for an exclusion that eliminates the tax entirely.
Do I pay capital gains tax if I sell to a cash buyer?
Capital gains tax rules are the same regardless of who buys your home. Whether you sell to Acquily, through an agent, or FSBO, the same exclusions and tax rates apply. The primary residence exclusion of $250K/$500K applies either way.
How do I avoid capital gains tax when selling my house in California?
The most common way is the Section 121 primary residence exclusion, which excludes up to $250,000 (single) or $500,000 (married) in gains if you lived in the home 2 of the last 5 years. Other strategies include 1031 exchanges for investment properties and installment sales.
Is capital gains tax different for inherited property?
Inherited property receives a stepped-up basis equal to the fair market value at the time of the owner's death. This means you only owe capital gains tax on appreciation after the inheritance date, not from the original purchase price. This can significantly reduce or eliminate capital gains tax.
Get Your Free Cash Offer