Capital gains tax can impact how much profit you keep when selling real estate in California, whether it is your personal residence or investment property. California’s tax rules are unique, and understanding how they apply to your sale is crucial to maximizing your returns.
In this article, we will break down how capital gains tax works in California, the differences between short-term and long-term gains, how the tax is calculated, and what sellers need to know to avoid costly surprises. Whether you are selling to a traditional buyer or accepting a fast cash offer from Matt Buys Houses, this guide will help you make informed decisions.
Understanding Capital Gains Tax
Capital gains tax applies when you sell an asset, such as a home, for more than you paid for it. Both the federal government and the State of California impose taxes on these profits, but California’s rules are stricter.
Let’s break down the basics so you can better understand how this tax applies to you.
What Are Capital Gains?
Definition and Explanation
A capital gain is the profit you make when you sell an asset like real estate for more than its original purchase price. These gains are considered taxable income.
Types of Capital Gains
Not all capital gains are taxed the same. Here is what differentiates short-term and long-term capital gains.
Short-Term Capital Gains
Gains on properties held one year or less are considered short-term and taxed as ordinary income. This is often higher for California homeowners, where income tax rates can reach 13.3 percent.
Long-Term Capital Gains
Gains on properties held more than one year qualify as long-term. Federally, long-term gains often receive lower tax rates, 0 percent, 15 percent, or 20 percent. However, California does not offer preferential tax rates for long-term capital gains. All capital gains are taxed as ordinary income.
How is Capital Gains Tax Calculated in California?
Calculating capital gains tax in California involves more than subtracting your purchase price from your sale price. You must also consider home improvements, selling costs, depreciation if applicable, and your income tax bracket.
Key Factors in the Calculation
Selling Price vs. Purchase Price
Your starting point is the difference between your sale price and the original purchase price of the home.
Cost Basis Adjustments
Your cost basis can be adjusted with qualifying expenses including renovations, legal fees, closing costs, and realtor commissions. These can reduce your taxable gain, so keeping accurate records is crucial.
California’s Tax Rates on Capital Gains
California treats capital gains as ordinary income. That means your profits are taxed according to California’s income tax brackets, which range from 1 percent to 13.3 percent depending on your total income.
California State Income Tax Brackets for 2024-2025
| Tax Rate | Single / MFS | Married Filing Jointly | Head of Household |
| 1% | $0 – $10,756 | $0 – $21,512 | $0 – $21,527 |
| 2% | $10,757 – $25,499 | $21,513 – $50,998 | $21,528 – $51,000 |
| 4% | $25,500 – $40,245 | $50,999 – $80,490 | $51,001 – $65,744 |
| 6% | $40,246 – $55,866 | $80,491 – $111,732 | $65,745 – $81,364 |
| 8% | $55,867 – $70,606 | $111,733 – $141,212 | $81,365 – $96,107 |
| 9.3% | $70,607 – $360,659 | $141,213 – $721,318 | $96,108 – $490,493 |
| 10.3% | $360,660 – $432,787 | $721,319 – $865,574 | $490,494 – $588,593 |
| 11.3% | $432,788 – $721,314 | $865,575 – $1,442,628 | $588,593 – $980,987 |
| 12.3% | $721,315+ | $1,442,629+ | $980,988+ |
Source: California Franchise Tax Board
High-income earners also pay an additional 1 percent Mental Health Services Tax on income over 1 million dollars, pushing the top rate to 13.3 percent.
Federal Capital Gains Tax Rates
At the federal level, long-term gains are generally more favorable.
- 0 percent, 15 percent, or 20 percent depending on your income
- Additional 3.8 percent Net Investment Income Tax may apply for high-income earners
- Short-term gains are taxed as ordinary income up to 37 percent federally.
Special Considerations for California Homeowners
Selling a home in California comes with specific tax challenges. Here is what homeowners need to know.
Exemptions and Exclusions
Primary Residence Exclusion
You may exclude up to $250,000 if single or $500,000 if married filing jointly of gains if:
- The home was your primary residence for two of the last five years
- You have not used this exclusion in the last two years
Inherited Property Step-Up in Basis
Inherited property typically receives a step-up in basis to market value at the time of inheritance, minimizing potential gains when sold.
1031 Exchanges Investment Property Only
If the home is an investment property, a 1031 exchange can defer capital gains taxes by reinvesting proceeds into another qualifying property.
Requirements include identifying a new property within 45 days, closing within 180 days, and using a qualified intermediary to hold proceeds.
Common Questions About Capital Gains Tax in California
1. Do I have to pay capital gains tax if I sell my house for cash?
Yes, the method of payment does not affect tax liability. It is based on your gain.
2. Can I avoid capital gains tax on my home?
You might qualify for the primary residence exclusion if you meet ownership and occupancy requirements.
3. Is there a long-term capital gains tax break in California?
No, California taxes all capital gains as ordinary income.
4. What about federal taxes?
Federal taxes favor long-term gains with reduced rates.
Sell Your House to Matt Buys Houses and Skip the Hassle
Selling your house for cash to Matt Buys Houses offers a fast, hassle-free solution without hidden fees or drawn-out negotiations. While we cannot eliminate your capital gains tax, we can help you close fast, sell as-is, and avoid traditional market headaches.
If you are ready for a no-obligation cash offer, contact Matt Buys Houses today.