When selling and buying a new primary residence in California, homeowners need to consider the capital gains rules at both the federal and state levels. Here’s an overview of how capital gains taxes work in California when selling and buying a new primary residence:
Federal Capital Gains Rules
Capital Gains Exclusion
The Internal Revenue Service (IRS) allows homeowners to exclude up to $250,000 of capital gains from taxation if they’re single ($500,000 for married couples filing jointly) when selling their primary residence. This exclusion applies if the homeowner meets the ownership and use tests.
Ownership and Use Tests
To qualify for the federal capital gains exclusion, homeowners must have owned and lived in the home as their primary residence for at least two out of the five years preceding the sale. These two years don’t have to be consecutive. For married couples filing jointly, both spouses must meet the ownership and use tests.
Exclusion Frequency
Homeowners can generally claim the capital gains exclusion once every two years. This means they can potentially use the exclusion each time they sell a primary residence, as long as they meet the ownership and use tests for each property.
Capital Gains Tax Rates
Any capital gains above the exclusion limit are typically subject to federal capital gains tax. The tax rate depends on the homeowner’s income and filing status. As of my last update, the long-term capital gains tax rates ranged from 0% to 20%, depending on the taxpayer’s income level.
California Capital Gains Rules
Conformity with Federal Rules
California generally conforms to federal tax laws regarding the taxation of capital gains on the sale of a primary residence. This means that if homeowners qualify for the federal capital gains exclusion, they’ll also qualify for the same exclusion for California state tax purposes.
No Separate Exclusion
Unlike some states that have their own separate capital gains exclusion for primary residences, California doesn’t offer an additional exclusion beyond what’s provided at the federal level. Therefore, any capital gains excluded for federal tax purposes will also be excluded from California state taxes.
State Capital Gains Tax Rates
If homeowners have capital gains that exceed the federal exclusion limit, they may owe California state capital gains tax on the excess gains. California’s capital gains tax rates align with the state’s income tax rates, which vary based on the taxpayer’s income and filing status. As of my last update, the rates ranged from 1% to 13.3%, depending on income level.
Understanding these federal and California capital gains rules is essential for homeowners when selling and buying a new primary residence, as it can affect their tax liabilities and financial planning strategies.