Capital Gains and Tax on Real Estate in California

Getting ready to sell your home can be both stressful and exciting, especially in markets where homes are selling quickly and at high prices. Despite high prices, California is a desirable place not only to live, given its abundant sunshine, beaches, and cultural amenities but also to invest in real estate. However, it’s important to consider the financial costs and tax implications for real estate transactions in the Golden State. 

Buying a home can be a very lucrative, assuming its value has increased over time. In most cases, when you sell a property, there are taxes, fees, and costs to be paid. Home sellers incur expenses that must be paid to the federal government and sometimes to states. Capital gains tax is a tax on the profit of the sale of an investment such as a home. To ensure selling a home or property is a worthwhile endeavor, it’s important to know the costs in order to determine whether now is the right time to sell. 

In the state of California, capital gains tax, transfer fees, and other expenses may significantly impact the amount of money a seller makes on the sale of a home. Here is everything you need to know about selling your property in the state of California.

Capital Gains Tax Rates in California

The federal government imposes different capital gains tax rates depending on how long the property is held by the owner. 

• Short-term capital gains taxes are those imposed on the sale of property sold less than a year after purchase. The profits from the sale are considered part of your income and taxed at your tax income tax bracket.
• Long-term capital gains taxes are owed for any profits made on the sale of a property owned for more than one year and taxed according to capital gains rates for the tax year 2024. 

Unlike the federal government, the state of California makes no distinction between short- and long-term capital gains and taxes all profits as income using the same brackets as the regular state income tax.

This applies to selling primary residences, second homes, mobile homes, condominiums, and other properties. You can expect to pay between 1%-12.3% depending on your income and filing status. Check with a tax attorney and research the California state tax law in order to predict what you will likely owe after the sale.

In some cases, however, there are capital gains tax breaks for sellers who meet specific criteria. According to the Franchise Tax Board of California, the maximum amount of capital gains that can be excluded for single filers is $250,000 and $500,000 for married couples or domestic partners. 

To qualify for the exclusion, the following criteria must be satisfied:

• The home is your primary residence.
• You’ve owned the home for at least two years in the five-year period before selling it.
• You’ve resided in the home for at least two years within the five-year period, although they don’t need to be consecutive years. Exceptions to this might be available to people with certain disabilities or those in the military.
• You have not already claimed an exclusion on another home within the past two years.

In other cases, those who have medical conditions, a sudden change of workplace location, or the sudden loss of a family member may qualify for the exclusion.

California Transfer Taxes

Sellers in California will also have to pay the state’s transfer taxes, which are imposed on the transfer of the property title from one person to another. 

One example is the documentary transfer tax, which is based on the value of the home and is typically paid by the seller, though this can be negotiated between buyer and seller. In California, the rate for the documentary transfer tax is $0.55 per $500 of property value. 

Cities may also have their own transfer taxes, like San Francisco, which has a progressive rate ranging from $2.50 to $30 per $500 of the value of the home. Los Angeles County’s total transfer rate is $1.10 per $500 of the home’s value. It’s important to check the rates for the city and county you reside in as both may significantly impact the total cost of the sale.

Property Taxes Owed

Proposition 13 governs California’s property taxes and limits the annual increase in the assessed value of a home to 2% or the rate of inflation, whichever is lower. The base property tax rate in California is 1% of the assessed value but local taxes may push the rate higher.

Property taxes are typically paid in two installments: the first is due November 1 and becomes delinquent after December 10. The second installment is due February 1 and becomes delinquent after April 10.

When a property is sold, the taxes are usually prorated between the buyer and seller based on the date of sale. The seller is responsible for paying the taxes up to the sale date, and the buyer assumes responsibility for paying the taxes thereafter. It’s worth mentioning that the sale of a home may trigger a reassessment, which can sometimes result in buyers having to pay higher property taxes.

Other Selling Expenses in California

For California sellers, there are additional costs that must be considered prior to the sale of a property. Those include:

• Title fees, which include title insurance and title search costs. Insurance may be higher in certain parts of the state than others. Title search costs range between $200-400 and are typically paid by the seller.
• Settlement fees, which are also called escrow fees, can range from $2-$3 per $1,000 of the sale price and are typically paid by the seller or, in some cases, may be split between the buyer and seller.
• Agent commissions are usually 5-6% of the sale price and typically paid by the seller though may be split between the buyer and seller’s agents.

Takeaways

There are many financial considerations to keep in mind when deciding whether to sell a property in California. Consult a tax professional, real estate agent, and attorney to get specific information you need depending on your specific situation.

To find an experienced agent, use FastExpert. You can find qualified Realtors in your area familiar with the local and state tax rates. Interview agents to get a diverse viewpoint and better help you understand all the costs involved before deciding to sell a property so that you can feel more at ease and make informed decisions and save you money, time, and stress.

Try FastExpert today and work with a Realtor you can trust.