How Much Taxes Do You Pay When You Sell a House in California?

Selling a home in California involves various tax considerations that can significantly impact the financial outcome of the transaction. Understanding these implications is important for any homeowner contemplating a sale. The process encompasses calculations and potential tax liabilities at federal, state, and local levels. Navigating these requirements properly helps ensure compliance and can optimize the net proceeds from a home sale.

Determining Your Taxable Gain

Calculating the taxable gain from a home sale is the foundational step in determining potential tax liabilities. This calculation begins with the “amount realized,” which is the selling price of your home minus certain selling expenses. These expenses commonly include real estate commissions, legal fees, and title insurance costs.

Next, determine your “adjusted basis” in the property. This generally starts with the original purchase price and increases with the cost of capital improvements that add to the property’s value or extend its life. It also accounts for any depreciation claimed if the property was ever rented. The gross gain is then calculated by subtracting the adjusted basis from the amount realized.

The Section 121 exclusion allows a portion of the gain from the sale of a principal residence to be excluded from taxable income. To qualify, you must meet both an ownership test and a use test. This means you must have owned and used the home as your main home for at least two out of the five years preceding the sale. The two years do not need to be consecutive.

The Section 121 exclusion allows single filers to exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000. This exclusion directly reduces your gross gain to arrive at your taxable gain, the amount subject to capital gains tax. For instance, a married couple with a $600,000 gross gain can exclude $500,000, leaving a taxable gain of $100,000.

Federal Capital Gains Tax

The taxable gain from your home sale is subject to federal capital gains tax. The rate depends on how long you owned the property. If held for one year or less, profit is a short-term capital gain, taxed at ordinary income rates. For most home sales, the property has been held for more than one year, resulting in a long-term capital gain.

Long-term capital gains receive preferential tax treatment, with rates typically 0%, 15%, or 20%. The specific rate depends on your overall taxable income for the year. These thresholds are adjusted annually for inflation.

The Net Investment Income Tax (NIIT) may apply to certain high-income taxpayers. This 3.8% tax is levied on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds specific thresholds. While the Section 121 exclusion generally exempts the excluded gain from NIIT, any taxable gain beyond the exclusion amount could be subject to this additional tax if your MAGI exceeds the relevant threshold.

California State Income Tax

California treats capital gains as ordinary income, unlike federal law, rather than at separate, lower capital gains rates. This means the taxable gain from your home sale, after applying the Section 121 exclusion, is added to your other income for the year. This combined income is then subject to California’s progressive state income tax rates.

California has multiple income tax brackets, with rates increasing as income rises. There is also an additional 1% mental health services tax on taxable income exceeding $1 million.

California largely conforms to federal law regarding the calculation of adjusted basis and the application of the Section 121 exclusion. The taxable gain determined for federal purposes is generally the same amount subject to California’s state income tax. The state’s progressive tax structure can result in a significant portion of your home sale gain being taxed at higher marginal rates depending on your total income for the year.

Local Transfer Taxes

Many cities and counties across California impose “transfer taxes” or “documentary transfer taxes” on real estate sales. These taxes are separate from capital gains taxes and are typically paid at the close of escrow. The California Documentary Transfer Tax Act (DTT) allows counties to levy a tax on the value of transferred property.

The standard county rate under the DTT is $1.10 for every $1,000 of the property’s value. Many cities within California impose additional municipal transfer taxes on top of the county fee, which can significantly increase the total tax burden.

These city-specific transfer taxes vary widely by location and can be substantial. While the seller often bears the cost of these transfer taxes, the responsibility can be negotiated between the buyer and seller as part of the sales agreement.

Reporting Your Home Sale

Reporting a home sale to the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) involves specific forms. When you sell your home, you typically receive Form 1099-S, “Proceeds From Real Estate Transactions,” from the closing agent. This form reports the gross proceeds from the sale to the IRS.

Even if the entire gain from your home sale is excluded under the Section 121 exclusion, you may still need to report the sale. If you receive Form 1099-S, or if you cannot exclude all of your capital gain, you must report the sale on your federal income tax return. This involves using Form 8949, “Sales and Other Dispositions of Capital Assets,” and Schedule D, “Capital Gains and Losses.”

For California state tax purposes, the sale is reported on California Form 540, “California Resident Income Tax Return,” and Schedule D-1, “Sales of Business Property.” Maintaining accurate records of your home’s purchase price, capital improvements, and selling expenses is important to correctly calculate your adjusted basis and determine your taxable gain.