Your home is often your family’s most significant investment. And with the recent skyrocketing of real estate prices, you might decide to sell your home and profit from the equity increase. But will you be taxed on the gain?
Every state has different tax laws. If you live in California, you need to know if California has a capital gains tax on real estate and how it works.
A capital gain is simply the increase in value of an asset from when you purchased it. When you sell the asset and take the profit, you “realize” the gain and may have to pay a tax on that capital gain.
Some states don’t tax capital gains, and others don’t tax capital gains on residential sales. But California does tax capital gains on residential sales in the state.
When you sell an asset for profit in California, you will be taxed on the capital gain you make. This applies to stock, bonds, real estate, cars, and most other assets you sell.
California does not have a separate capital gains tax rate, unlike some jurisdictions. California taxes you on the profit of your residential sale as if it were ordinary income you earned. The tax rate will depend on your marginal tax when calculating your California income tax.
The California capital gains tax applies to profits you make when you sell certain like cars, stocks, bonds, and real estate. These profits are taxed as regular income. When calculating your California capital gains tax, you need to know your marginal tax bracket.
The California capital gains tax is calculated using the following formula:
Capital Gain = Sale Price of Asset – Adjusted Basis – Selling Expenses
For example:
Let’s say you bought a house in San Diego for $600,000 and then sold it for $800,000. Your capital gain would be $200,000 ($800,000 – $6000,000). If your expenses, like real estate commissions, were $20,000, your capital gain would be reduced to $180,000.
And if you made improvements on the house, like a roof or a pool, of $50,000, your adjusted basis would be the $600,000 you paid for the house, plus the $50,000 improvement, or $650,000.
So your taxable capital gain is $150,000.
California follows the IRS rules that allow you to exclude a certain amount of the gain you make on your home if you meet certain qualifications. Qualifying individuals can exclude $250,000, and qualifying couples can exclude $500,000.
You can take the exclusion if:
During the 5 years before you sell your home, you have at least:
Also, you can only have one home at a time, and it must be one of the following:
As an individual, if the gain from the sale was less than $250,000, you do not owe a capital gain tax, and you do not need to report the sale. You must report the sale if the gain is higher; any gain over $250,000 is taxable.
For example:
If you bought a house in Los Angeles for $500,000, owned it and lived in it for five years, and then sold it for $700,000, you have a capital gain is $2000,000. Under the 2 in 5 rules, you owe no taxes and do not have to report the sale.
The California rules for married couples or Registered Domestic Partners (RPD) are similar.
These couples can exclude up to $500,000 if all of the following apply:
Any gain over $500,000 is taxable .
