DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not legal or tax advice. If you need assistance navigating the legalities or tax implications of selling a house in California, HomeLight always encourages you to reach out to your own advisor.
Though California is often regarded as a high-tax state, its property and other real estate-related taxes are more middle of the road.
“The perception here is that state income taxes are high, but just on the real estate taxes themselves, they’re pretty comparable to the rest of the country,” said Craig Aird, an associate attorney with Donahoe, Young & Williams LLP who specializes in estate planning, tax, and immigration.
Some of California’s real estate taxes do vary throughout the state, however, as do the expectations on who pays certain portions of a real estate transaction.
To help you navigate some of these complexities, we’ve compiled a list of taxes you can expect to pay when selling your home.
Capital gains tax
If you profit from the sale of a home in California, then you may owe some amount of capital gains tax unless you qualify for an exclusion, which we’ll address under the chart below.
Capital gains are the profits made when you sell an appreciable asset, such as a house. For example, if you buy a home for $200,000 and sell it for $500,000, then you have a capital gain of $300,000.
In California, capital gains are taxed by both the state and federal governments.
On the state level, California’s Franchise Tax Board (FTB) taxes all capital gains as regular income. Depending on your tax bracket, the tax can be anywhere from 1% to 13.3%.
On the federal level, gains can either be considered short-term or long-term.
- Short-term capital gains are when you sell an asset within a year of purchasing it. Those gains are included in your ordinary income and taxed according to your tax bracket.
- Long-term capital gains are any profits made from the sale of an asset after at least a full year of ownership. For a home sale, those gains are taxed according to the following table.
|Long-term capital gains rate||Taxable income|
|0%||$0 to $41,675|
|15%||$41,676 to $459,750|
|20%||$459,751 or more|
|Married filing jointly|
|0%||$0 to $83,350|
|15%||$83,351 to $517,200|
|20%||$517,201 or more|
Both the IRS and FTB provide a capital gains tax break for home sellers who meet certain conditions. The maximum amount of capital gain that can be excluded is $250,000 for single filers, or $500,000 for a married couple filing jointly.
To qualify for the full exclusion amount, the following criteria must be met:
- The home being sold is your primary residence.
- You’ve owned the home for at least two years in the five-year period before selling it.
- You’ve lived in the home for at least two years within the five-year period before selling it. The years you’ve lived in it don’t need to be consecutive. Certain exceptions to this rule are made for those who are disabled or those in the military, Foreign Service, intelligence community, or Peace Corps.
- You didn’t acquire the home through a like-kind exchange (also known as a section 1031 exchange) within the last five years. This is basically when you swap one investment property for another.
- You haven’t claimed the exclusion on another home in the last two years.
- You aren’t subject to expatriate tax (a government fee paid by those who renounce their citizenship or take up residency in another country).
If you don’t quite check all of these boxes, you may still qualify for a partial exclusion of gain. This can happen if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event. For details on such circumstances, click here.
How to report your capital gains taxes in California
For your federal return, report your capital gains and losses by using U.S. Individual Income Tax Return (IRS Form 1040) and Capital Gains and Losses, Schedule D (IRS Form 1040).
For your California capital gains, file California Capital Gain or Loss Schedule D (540).
California transfer taxes
A transfer tax is a transaction fee tacked onto the sale of any land or real property.
California’s documentary transfer tax varies depending on the location within the state.
The law permits general law counties and cities to charge 55 cents per $500 of property value or the amount paid ($1.10 per $1,000).
This amount can only be increased by charter counties or cities — those that have adopted a charter and therefore have supreme authority over municipal affairs. Of California’s 479 cities, 121 have charters.
Here are some examples of what the documentary transfer tax looks like in a few of California’s largest cities:
|Location||Transfer tax rate on a $500,000 home*||Transfer tax paid on a $500,000 home|
|San Diego||55 cents per $500||$550|
|Sacramento||$1.375 per $500||$1,375|
|San Francisco||$3.40 per $500||$3,400|
|Los Angeles||$4.50 per $500||$4,500|
*The transfer tax rate in some cities is tiered so that the greater the purchase price or market value, the greater the tax.
When transferring a home in California, the seller usually pays the tax, but this can be a point of negotiation during the transaction. If left unpaid by the time the sale goes through escrow, then the payment responsibility automatically falls on the buyer.
Property taxes owed
Annual property taxes in California have two payment stubs. They can be paid simultaneously or in two installments.
The first installment is due Nov. 1 and becomes delinquent Dec. 10. The second installment is due on Feb. 1 and becomes delinquent April 10.
Once a home is sold, the seller is no longer responsible for its property taxes.
For example, if the fictional Jim and Susie pay the first installment in November and then sell their Sacramento home in December, it is now up to the buyers to cover the second installment due in the spring.
Aird says he experienced a scenario like this firsthand as the buyer of a California home in 2021.
“Part of the closing cost was paying into an escrow for that next property tax payment that was due in a few months,” Aird says. “It was our responsibility as the buyer.”
What about selling an inherited home in California?
For starters, there are no estate or inheritance taxes in California. So you don’t owe taxes just for inheriting a property.
As the heir, however, you do take on any debts attached to the property, such as an outstanding mortgage.
When selling an inherited home, many of the same considerations apply as they do to selling any California property. Where things differ the most are with capital gains.
Fortunately for heirs, the values of inherited assets are adjusted by what’s called a stepped-up basis, says Aird. This means that no matter how much a home has appreciated in value since originally purchased, a decedent’s heirs are not responsible for paying the taxes on those historical gains if they choose to sell the home. Rather, the property automatically converts to the current fair market value.
If the heirs choose to immediately sell that property for the assessed fair market value, then there are no gains to speak of. However, if they sell the property for more than the fair market value, or choose to hold onto the property for a while before selling and its value continues to appreciate during that time, then those are considered taxable gains.
Other selling expenses to anticipate in California
- Title fees: These consist of title insurance and a title search. Title insurance is a contractual obligation to protect against any issues with a home’s title, such as illegal deeds, undiscovered wills, or forgeries. In Northern California, it is customary for the buyer to pay for the title insurance, but the opposite is usually the case in Southern California. It’s not uncommon for the parties to negotiate over this item or split the cost, which can range between 0.5% and 1% of the sale value. A title search, which costs between $75 and $200, can be paid by either the seller or the buyer and is done to prove that the seller is the rightful owner of the property and that there are no outstanding claims or judgments.
- Settlement fees: Amounting to about 1% of the home sale value, this lump sum (also known as escrow fees) is issued by the title company, escrow company or attorney that is facilitating the closing of the transaction. The payment is designed to cover all that’s involved in handling the final paperwork and distributing funds to the appropriate parties. As with title fees, this can be paid by either the buyer or seller, but is often split between both parties.
- Agent commissions: The agent commission fee in California is generally about 6% (3% for the buyer’s agent and 3% for the listing agent). The seller typically pays for both agents’ commissions.
Ways to prepare for real estate taxes
Real estate taxes don’t need to be a surprise or intimidating.
There are some simple steps to take that can help you prepare for what’s to come if you decide to sell a home in California.
- Know your home’s value: One initial step is to use an online Automated Valuation Model (AVM) tool like HomeLight’s free Home Value Estimator. Having a ballpark idea of what your home might be worth can help you calculate the potential capital gains from the home sale.
- Save the right documents: Another step is to know what tax documents you will need if you purchased or sold a home. Consult with your tax advisor about the federal and state documents required to file in California, and what tax breaks might be available for your selling situation.
- Find a top agent: Another helpful step can be to partner with an experienced real estate agent who can guide you through the home sale process. A qualified agent can help you understand the tax ramifications and ensure a favorable outcome by maximizing your profit. Our data shows that the top 5% of real estate agents across the U.S. sell homes for as much as 10% more than the average real estate agent.
HomeLight’s free Agent Match platform makes it easy to find top-performing real estate agents in your market. We account for factors like the real estate agent’s sale-to-list price ratio and how that maps to local price trends so that you can find top agents who will put more cash in your wallet when you close.
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