Capital gains tax on a California home sale: the short answer
Two governments tax the profit when you sell California real estate. The federal government taxes long-term gains at 0%, 15% or 20%. California taxes the same gain as ordinary income at your regular rate. The Franchise Tax Board says it plainly: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income."
| Item | Federal (IRS) | California (FTB) |
|---|---|---|
| Main-home exclusion | $250,000 single, $500,000 joint (IRC section 121) | Same exclusion, adopted by Revenue and Taxation Code section 17152 |
| Rate on long-term gain | 0%, 15% or 20% by taxable income (2026 thresholds below) | Ordinary income rates of 1% to 12.3% (2025 schedules) |
| Extra tax on high incomes | 3.8% net investment income tax over $200,000 single or $250,000 joint MAGI | 1% Behavioral Health Services Tax on taxable income over $1,000,000 |
| Depreciation on a rental | Taxed at up to 25% | Taxed as ordinary income |
| Short-term gain (held one year or less) | Ordinary income rates | Ordinary income rates |
So the top combined marginal rate on a large gain is 20% plus 3.8% federal and 13.3% state. That is why the exclusion, your cost basis and the timing of the sale matter so much more in California than in a state with no income tax.
The home sale exclusion: rules from IRC section 121
Ownership and use test for the $250,000 or $500,000 exclusion
The IRS lets you exclude up to $250,000 of gain from the sale of your main home, or $500,000 on a joint return. You must have owned the home for at least 24 months and lived in it as your main home for at least 24 months during the five years ending on the sale date. The two periods do not have to overlap. On a joint return, one spouse must meet the ownership test and both must meet the use test. California adopts the same rule in Revenue and Taxation Code section 17152, with small changes, such as counting up to 18 months of Peace Corps service toward the two years.
The two-year lookback between excluded sales
You generally cannot use the exclusion if you excluded gain on another home sold in the two years before this sale. Owners who flip between two homes, or who sell a primary home and then a former primary home soon after, should map out the dates before listing.
Partial exclusion after a job move, health issue or unforeseeable event
If you sell before meeting the 24-month tests, you may still get part of the exclusion when the main reason was a change in workplace location, a health issue or an unforeseeable event. IRS Publication 523 works it out by taking the shortest of your residence time, ownership time or time since your last excluded sale, dividing by 24 months, and multiplying by $250,000. Each spouse runs the calculation separately and the results are added.
Nonqualified use after 2008 and former rentals
If you rented the home or left it empty before moving in, part of the gain may not qualify. Publication 523 says any period after 2008 when the property was not your main home is generally "nonqualified use", and the gain allocated to that period cannot be excluded. Time after you move out, within the five-year window, is one of the exceptions. Depreciation you claimed after May 6, 1997 can never be excluded and is taxed when you sell.
Surviving spouses and divorce
A surviving spouse who has not remarried can count the time the late spouse owned and lived in the home. If a divorce order lets your former spouse live in the home, you can count that time as your own use for the ownership test, though you must still meet the residence test yourself. Both rules come from Publication 523.
How to figure your gain on a California home
The taxable gain is not the difference between your purchase price and sale price. It is the amount realized minus your adjusted basis.
Amount realized: sale price minus selling costs
Start with the contract price and subtract the costs of selling: commissions, the seller's share of escrow and title fees, and the county and any city documentary transfer tax. Our California closing costs guide lists the usual seller costs, and the transfer tax guide covers city rates such as Los Angeles's Measure ULA.
Adjusted basis: purchase price plus capital improvements
Your basis is what you paid, plus some purchase costs and the cost of improvements. Publication 523 lists settlement costs you can add, including legal fees, recording fees, survey fees, transfer taxes and owner's title insurance. Improvements that add value or extend the life of the home count: a new roof, an addition, an ADU, a remodeled kitchen. Routine repairs and painting do not, unless they were part of a larger improvement project. Keep the permits, invoices and closing statements for as long as you own the home.
Inherited homes and the community property step-up
If you inherited the home, your basis is generally its fair market value on the date of death. California is a community property state. Publication 523 explains that when one spouse dies, the full fair market value of community property becomes the basis of the whole property, including the surviving spouse's half. A widow or widower who sells soon after may owe little or nothing, even on a home bought decades ago. Get a date-of-death appraisal. Our probate real estate guide covers selling through an estate.
Federal and California rates on a home sale gain
Federal long-term capital gains brackets for 2026
Revenue Procedure 2025-32 sets the 2026 thresholds. The 0% rate applies to taxable income up to $98,900 on a joint return or $49,450 for single filers. The 15% rate applies up to $613,700 joint or $545,500 single. Above that, the rate is 20%. Heads of household have a 0% ceiling of $66,200 and a 15% ceiling of $579,600. The thresholds include the gain itself, so a large sale can push part of the gain into a higher bracket.
California income tax brackets that apply to the gain
California adds the taxable gain to your other income and taxes the total on the regular schedules. For 2025 returns, the joint schedule reaches 9.3% at $145,448 of taxable income, 10.3% at $742,958, 11.3% at $891,542 and 12.3% at $1,485,906. For single filers the same rates start at $72,724, $371,479, $445,771 and $742,953. The FTB adjusts the brackets each year, so check the schedule for the year you sell.
Behavioral Health Services Tax on income over $1 million
On top of the brackets, California charges 1% on taxable income above $1,000,000. The FTB's 2025 instructions note that the Mental Health Services Tax was renamed the Behavioral Health Services Tax from 2025. It applies to all filers above the threshold, joint or single, and is the reason the top California rate is 13.3%.
The 3.8% net investment income tax
The IRS charges 3.8% on net investment income when modified adjusted gross income is over $250,000 joint or $200,000 single. The excluded part of a main-home gain does not count. The taxable part above the exclusion does. California has no equivalent.
Worked examples: capital gains tax on California home sales
These examples use the 2026 federal thresholds and the 2025 California schedules, and assume the gain is the only change to income. They ignore deductions and credits, so treat them as estimates, not a tax return.
Example 1: a married couple selling a long-held main home
A couple bought their home in 2006 for $400,000 and spent $50,000 on a kitchen and a new roof. They sell in 2026 for $1,100,000 and pay $60,000 in selling costs. Their other taxable income is $150,000.
| Step | Math | Result |
|---|---|---|
| Amount realized | $1,100,000 - $60,000 | $1,040,000 |
| Adjusted basis | $400,000 + $50,000 | $450,000 |
| Gain | $1,040,000 - $450,000 | $590,000 |
| Taxable after exclusion | $590,000 - $500,000 | $90,000 |
| Federal tax | $90,000 x 15% (income stays under $613,700) | $13,500 |
| Net investment income tax | MAGI about $240,000, under $250,000 | $0 |
| California tax | $90,000 x 9.3% (already in the 9.3% bracket) | $8,370 |
| Total | about $21,870 |
Example 2: a surviving spouse after the community property step-up
The same couple held the home as community property. One spouse died in 2025 when the home was appraised at $1,050,000. The basis of the whole home steps up to $1,050,000. If the survivor sells in 2026 for $1,100,000 with $60,000 of costs, the amount realized is $1,040,000, which is below the new basis. There is no gain to tax at all.
Example 3: a partial exclusion after a job transfer
A single owner buys a condo, lives there 12 months and is transferred out of state. The sale produces a $180,000 gain. The partial exclusion is 12 / 24 x $250,000 = $125,000, leaving $55,000 taxable by both the IRS and California.
Example 4: a former home that became a rental
An owner lived in a house for 10 years, then rented it out for 4 years and claimed $40,000 of depreciation. The use test fails (only one year of residence in the last five), so no exclusion applies. The whole gain is taxable. The $40,000 of depreciation is taxed federally at up to 25%, and California taxes all of it as ordinary income. Selling within three years of moving out keeps the exclusion available, though depreciation is still taxed.
California real estate withholding at closing
The 3 1/3% withholding and Form 593
Revenue and Taxation Code section 18662 requires escrow to withhold state tax on many California real estate sales. FTB Publication 1016 says it is a prepayment of income tax, not an extra tax. Unless an exemption applies, the default is 3 1/3% of the total sales price. On a $1,100,000 sale that is $36,630. Sellers can instead elect the alternative method, which withholds on the estimated gain at the maximum rate.
Exemptions: main home, sale price under $100,000 and losses
No withholding is due when the total sales price is $100,000 or less. A seller who meets the section 121 main-home test is fully exempt, and the FTB applies the same job, health and unforeseen-circumstance exceptions to the two-year rule. Other exemptions include qualifying 1031 exchanges and sales at a loss. You certify the exemption on Form 593 before close of escrow. The FTB sets a penalty of the greater of $1,000 or 20% of the required withholding for a false certificate.
Getting withholding back
Withholding is credited against your California tax for the year. Escrow sends Form 593 to the FTB and to you by the 20th day of the month after closing. Claim it on your return; if it is more than you owe, the FTB refunds the difference.
Deadlines and how to report the sale
Reporting on your federal return
You must report the sale if you receive Form 1099-S, even when the whole gain is excluded, or if any gain is taxable. Use Form 8949 and Schedule D of Form 1040. Keep the closing statement and improvement records with your return.
Reporting on your California return
California uses your federal figures as the starting point. If federal and state treatment differ, for example because of a different basis or depreciation, file California Schedule D (540). Nonresidents who sell California property report on Form 540NR.
Estimated tax payments after a large gain
A gain that is not covered by withholding can trigger an underpayment penalty. Ask your tax preparer whether to make an estimated payment for the quarter of the sale. California's withholding credit counts toward state estimates.
Legal ways to reduce capital gains tax on California real estate
1031 exchanges for rentals and investment property
A like-kind exchange under IRC section 1031 defers gain on investment property, not your main home. If you exchange California property for property in another state, the FTB requires an annual FTB 3840 information return for every year you hold the replacement property, so California can tax the deferred gain when you eventually sell.
Timing the sale around the exclusion and your income
Selling after you pass the 24-month mark, in a year with lower other income, or before a rental period breaks the use test can change the result by tens of thousands of dollars.
Documenting basis
Every documented improvement lowers the gain. Owners who have lived in a California home for 20 years or more often find receipts for roofs, solar, windows and additions that cut the taxable amount.
Moving out of state does not end California's claim: gain on California real estate is California-source income. See our guide to moving out of California. If you are 55 or older and buying another California home, the Prop 19 guide explains how to keep your property tax base, which is a separate question from income tax.
Common mistakes with capital gains on a California home sale
- Assuming California taxes gains at a lower rate. It does not. Budget for your full marginal rate.
- Forgetting selling costs and improvements. Both reduce the gain. Commissions alone can be tens of thousands of dollars.
- Missing the community property step-up. Surviving spouses who use the original purchase price overpay.
- Renting the home too long before selling. After three years away, the use test fails and the exclusion is gone.
- Not filing Form 593. Without the exemption certificate, escrow withholds 3 1/3% of the price.
- Ignoring the net investment income tax. A large taxable gain can push income over $250,000 and add 3.8%.