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I recently read a great article by Jeff White published in Seeking Alpha that offered valuable insight into how California treats capital gains—especially important if you’re planning to sell real estate in the Golden State. I’ve gathered some key points from that article and added real-life examples and explanations to help homeowners and investors better understand how this may affect them.
Capital Gains Tax Rates in California
Unlike some states, California taxes all capital gains as ordinary income, regardless of whether they’re short-term or long-term. This is different from the federal system, where long-term capital gains are typically taxed at lower rates.
Here’s what you need to know:
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California’s capital gains are taxed at the same rate as your regular income (ranging from 1% to 13.3%).
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This applies to the sale of assets like stocks, investment properties, and even real estate.
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The tax is triggered when you sell an asset for more than you paid—creating a realized gain.
How California Capital Gains Tax is Calculated
The formula used to calculate your capital gain is:
Capital Gain = Sale Price – (Adjusted Basis + Selling Expenses)
Let’s walk through an example:
Example:
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You purchased a rental property in Orange County for $500,000.
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You later sell it for $740,000.
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You made capital improvements of $50,000, bringing your adjusted basis to $550,000.
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Selling expenses (e.g., real estate commissions, title, escrow) totaled $40,000.
Your taxable capital gain would be:
$740,000 – ($550,000 + $40,000) = $150,000
This $150,000 gain would be taxed at your ordinary California income tax rate. For example, if you’re in the 9.3% bracket, your state capital gains tax would be around $13,950.
Note: This is in addition to any federal capital gains taxes you may owe.
What About Selling Your Primary Residence?
Good news: If you’re selling your primary residence, you might qualify for the IRS Section 121 exclusion, which can eliminate capital gains taxes altogether—federally and in California.
Here’s how it works:
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You must have lived in the home for at least 2 out of the last 5 years before the sale.
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Single homeowners can exclude up to $250,000 of gain.
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Married couples filing jointly can exclude up to $500,000 of gain.
If your gain is within those limits and you meet the residency requirements, you may owe zero in capital gains taxes.
One Last Thing: Always Consult a Tax Professional
While the information shared here is meant to help you understand the basics, tax laws are complex and can change often. Your specific tax liability will depend on many factors, including your income level, deductions, filing status, and other investments.
Before making any real estate moves, I highly recommend speaking with a licensed CPA or tax advisor who can walk you through the numbers based on your unique situation.
Need Help? Let’s Talk
If you have questions or are thinking about selling a property, feel free to reach out. I’m happy to discuss your goals and connect you with trusted tax professionals as needed. Whether you’re navigating an investment sale or planning your next move, smart tax planning can make all the difference.
