California Capital Gains Tax When Selling a Home

Understanding San Diego capital gains tax when selling a house in the Golden State is a complicated and expensive puzzle. While the thought of the sales proceeds might have you dreaming of sandy beachfront properties and peaceful retirement, there’s an important factor you should consider. “How much are you paying in capital gains taxes?”

California capital gains tax is based on the profit you make from selling your house. Sadly, it can take a significant bite out of your profits. Many San Diego sellers are unaware of how much capital gains taxes are in CA. If not properly planned for, taxes can absolutely wreck your home sale profits. Understanding how capital gains taxes work, and knowing the strategies available to minimize them, can make a huge difference in your financial outcome.

Whether you’re a first-time seller or a seasoned homeowner, being well-versed in the nuances of California capital gains tax is a critical part of the selling process.


What is California Capital Gains Tax

In California, both federal and state capital gains taxes must be paid when selling a property. For federal taxes, the rate can range from 0% – 20% based on your income. If you’re a single filer making between $40,001 – $441,450 or married filing jointly making between $80,001 – $496,600, the 15% tax bracket is where you land. For homeowners that make more money than these amounts, 20% is your federal capital gains tax when selling a home.

For California, it’s a bit more straightforward. The Golden State treats capital gains as regular income. What does this mean? Capital gains are taxed at the same rate as the rest of your income. The CA tax rate ranges from 1% – 13.3%, depending on how much money you earn each year.

Overall, California capital gains tax is nothing to be too fearful of. For homeowners that want to get it over with quickly, contact SD House Guys. We buy houses throughout California for cash. Our quick closings offer homeowners the opportunity to knock bills and taxes out early. If you’ve thought that I need to sell my house fast in San Diego and pay off the capital gains tax, contact our team today.


Saving Grace: The Home Sale Tax Exclusion

San Diego Capital Gains Tax

Thankfully, not every aspect of California capital gains tax is bad. The IRS offers a deal called the Home Sale Tax Exclusion, which benefits San Diego home sellers. If you’ve lived in your California home for at least two of the last five years before selling it, you’re lucky. Homeowners that fall into that bucket can exclude this amount from the total taxable sum:

  • Single homeowners: up to $250,000
  • Married homeowners filing jointly: up to $500,000

The Home Sale Tax Exclusion allows California residents to sell their properties and keep massive amounts of their money tax-free.


Smart Tax Moves for San Diego Homeowners

It’s important for California residents to strategize how to go about paying taxes. Now that you understand the lay of the tax land, it’s time to get into actionable tips that will save you money. Navigating San Diego capital gains tax when selling a home is doable with these tips:

1. Establish Your Cost Basis

A homeowner’s cost basis is the financial investment put into the property you’re selling. It isn’t just the initial price you paid for your home in San Diego. Cost basis includes various other expenditures that have added value to your property over years of homeownership. For example:

  • Extending your home by adding a new room
  • Remodeling your kitchen
  • Major basement repairs
  • Installing a new roof
  • Landscaping improvements
  • Renovating the foundation

Cost basis calculations are an integral component of determining how much capital gains tax you pay. Calculate this tax-saving tip by subtracting your cost basis from your sale price. The higher your established cost basis, the lower your taxable capital gain!

Sale Price – Cost Basis = Capital Gain

Understanding and properly documenting your cost basis can result in considerable tax savings. For instance, if you purchased your home for $700,000, and you’ve spent $150,000 on improvements, your cost basis would be $850,000. If you then sell the house for $1,000,000, you’ll only be taxed on $250,000 of capital gains. When living in California – as expensive as it is – it’s vital to save money where you can.

NOTE: the repairs that fall into the “cost basis” category must be substantial improvements, not just routine repairs or maintenance. Fixing your toilet seat doesn’t count, unfortunately. Keep detailed records and receipts of these improvements. You want to back up what you say if the IRS comes knocking on your door! Consulting with a tax advisor can help you dial in your cost basis and save thousands in capital gains tax.

2. Timing Your Home Sale

As a California homeowner, the timing of your home sale plays a huge role in how much capital gains tax you owe. This is where the IRS Home Sale Tax Exclusion comes into play. If you’ve used your home as your primary residence for at least two of the last five years before the sale, you’re eligible to exclude a substantial amount of your profit from capital gains tax.

  • Individuals: $250,000
  • Married couples filing jointly: $500,000

This tax exclusion is very helpful when you’re selling your home. For example, if you’re a single homeowner who bought a house in San Diego for $600,000 and lived in it for at least two years, if you sold the house for $850,000, your capital gain would be $250,000. How much capital gains tax would you owe in California? ZERO! Thanks to the Home Sale Tax Exclusion, you would not owe any capital gains tax on this profit. The savings from this can be significant, depending on your tax bracket.

Relocating now might cost you if the timeline doesn’t line up with this window. It might be financially beneficial to delay the sale – pending life circumstances – until you have occupied the San Diego property for two years.

3. Consult a Tax Professional

While we hope this guide on untangling California capital gains taxes when selling property in San Diego has been helpful so far, we are not tax experts. When dealing with tax liabilities, it’s often a smart move to consult with a tax professional to know exactly what is what!


Avoid Capital Gains Tax in San Diego CA: 1031 Exchange

A San Diego house in good repair can shine brighter on the market than ones that need to be fixed up. Especially in a competitive real estate market, San Diego buyers demand pristine properties when making offers. Move-in-ready homes in San Diego are selling for an average of 17% more than their fixer-upper counterparts. Is it worth it to do repairs to your home before selling it? San Diego buyers are willing to pay a premium for the peace of mind that comes with knowing their new home is free from hidden costs or time-consuming repairs. For owner-occupant buyers that are families with children and a dog – they want a property that they can immediately move into without any hiccups. Turnkey homes also attract a higher number of offers, intensifying bidding wars, and driving prices upward. So, spending a weekend fixing that squeaky door or repairing that garden fence might not just boost your selling price, but could also ignite a bidding frenzy. DIY home renovations before selling are worth it if you’re looking for the most bang for your buck. Here are several examples of items you should fix before selling your home

Have you heard of California homeowners using a 1031 exchange to avoid capital gains tax when selling? Although 1031 exchanges primarily apply to investment properties rather than primary residences, it allows owners to defer paying capital gains taxes. What’s the catch? The money from the sale of the home in CA must be reinvested into a similar type of property. You must sell and then buy!

A 1031 Exchange is attractive to many California investors because of its significant financial benefits, particularly in cities like Carlsbad where property values are high.

How 1031 Exchanges Work

Example: You bought a rental property years ago in San Diego for $450,000 and now you’re selling it for $750,000. Normally, you’d owe capital gains tax on the $300,000 profit. However, if you use a 1031 exchange and reinvest that $750,000 into another rental property. How much capital gains tax do you pay? ZERO!

Note, the rules for a 1031 exchange are strict. Both properties that are sold and bought need to be investment or business properties, not primary residences. This is an investor-friendly tax strategy. Additionally, there are specific timeframes for identifying and closing on the new property (usually 12 months). However, if you can execute a 1031 exchange correctly, it’s a powerful way to level up your real estate portfolio.


Tackle California Capital Gains Tax After a Home Sale

California Capital Gains Tax

California capital gains tax can seem daunting at first. Thankfully, there are strategies homeowners can use and rules in place that can help reduce the burden. Remember, selling your home is a significant financial event. With the right approach and knowledge, you can navigate it to your advantage. San Diego homeowners, use these capital gains tax strategies to help you pay less and save more.

Regardless of where you live in California, the capital gains tax rules apply. Overall, these tax rules are the same for places like San Jose, Los Angeles, Bakersfield, San Francisco, and Fresno.