When you sell a house in California, taxes on the sale can include federal capital gains tax of up to 20%, California income tax of up to 13.3% on the same gain, a 3.8% federal surtax for high earners, county and city transfer taxes at closing, and withholding remitted from your sale proceeds. Most sellers of a primary residence pay far less than that headline suggests, because federal law lets single filers exclude up to $250,000 of gain and married couples filing jointly up to $500,000. Everything else in the calculation flows from whether your profit fits under that exclusion or spills over it.
Figuring Out Your Actual Gain
Your taxable gain is the sale price minus your adjusted basis, not the sale price minus what you paid. Adjusted basis starts with the original purchase price and grows with capital improvements and selling costs. Every dollar you add to basis is a dollar you don’t pay tax on, so this calculation matters more than any other number in the transaction.
Capital improvements are projects that add value, extend the home’s useful life, or adapt it to a new use: adding a bathroom or bedroom, replacing the roof, installing central air, remodeling a kitchen, building a deck, landscaping. Routine maintenance and repairs (painting, fixing leaks, replacing broken hardware) don’t count. The IRS does allow one useful exception: repair-type work performed as part of an extensive remodel can be treated as an improvement. You cannot add the value of your own labor, even if you did the work yourself.1Internal Revenue Service. Publication 523, Selling Your Home
Selling costs also reduce your gain. Real estate commissions, title insurance, legal fees, escrow fees, and transfer taxes paid by the seller all fold into the calculation. Say you paid $400,000 for the home, put $60,000 into qualifying improvements over the years, and paid $35,000 in selling expenses at closing. Your adjusted basis is $495,000. A sale at $900,000 produces a gain of $405,000 before any exclusion.
The Primary Residence Exclusion
Federal law lets you exclude a substantial portion of the profit on your main home. Single filers can exclude up to $250,000 of gain; married couples filing jointly can exclude up to $500,000.2Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence To qualify, you must have owned and lived in the home as your primary residence for at least two of the five years before the sale. The two years don’t have to be consecutive.
For the $500,000 joint exclusion, at least one spouse must meet the ownership test, both must meet the use test, and neither can have claimed the exclusion on another home sale within the previous two years. Any gain above the exclusion is taxable. California recognizes this federal exclusion, so anything excluded federally is also excluded on your state return.
Partial Exclusion for Job, Health, or Unforeseeable Events
If you sell before meeting the two-year requirement, you may still qualify for a partial exclusion when the sale is driven by a job relocation, a health issue, or an unforeseeable event. For a work move, your new workplace generally must be at least 50 miles farther from the home than your old one was. For a health move, you or a family member must need the relocation to obtain or provide medical care, or a doctor must recommend the change of residence.1Internal Revenue Service. Publication 523, Selling Your Home
The partial amount is prorated by the fraction of the two years you actually met. Owned and lived in the home for one year before a qualifying job transfer? You could exclude up to $125,000 as a single filer or $250,000 as a married couple.
Federal Capital Gains Rates on What’s Left
If your gain exceeds the exclusion, the leftover is taxed. How long you owned the home determines the rate. Held one year or less, the gain is taxed at ordinary income rates from 10% to 37%.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses Most home sales don’t fall into this bucket.
Held longer than a year, the gain qualifies for long-term capital gains rates of 0%, 15%, or 20%. For 2026, the 0% rate applies to taxable income up to roughly $49,450 (single) or $98,900 (joint). The 15% rate covers income up to about $545,500 (single) or $613,700 (joint). The 20% rate applies above those thresholds.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses These rates apply only to gain that exceeds your Section 121 exclusion.
How California Taxes the Same Gain
California does not offer a lower rate for capital gains. The state taxes all gains as ordinary income regardless of holding period. Marginal rates run from 1% to 12.3%, and an additional 1% Mental Health Services Tax applies to taxable income above $1 million, bringing the effective top rate to 13.3%.4Franchise Tax Board. 2025 California Tax Rate Schedules Because California honors the federal exclusion, only the taxable portion of your gain feels this. On that portion, a seller in the top brackets can face a combined federal-and-state rate above 33%.
The 3.8% Net Investment Income Tax
High earners face an extra federal surtax of 3.8% on net investment income, which includes capital gains from a home sale. The tax applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 (single), $250,000 (joint), or $125,000 (married filing separately).5Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax Gain that qualifies for the Section 121 exclusion is not counted as net investment income, so if your entire profit is excluded, the surtax does not apply.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax Cross the thresholds with taxable gain above the exclusion, and 3.8% stacks on the regular capital gains rate.
Depreciation Recapture Catches Sellers Off Guard
If you ever rented out your home, used part of it as a home office, or claimed depreciation deductions for any reason, the IRS wants some of that tax benefit back at sale. The portion of your gain attributable to previously claimed depreciation is taxed at a maximum federal rate of 25%, regardless of your income bracket.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The Section 121 exclusion does not cover recapture. Even if your total gain falls under the $250,000 or $500,000 limit, the portion tied to depreciation claimed after May 6, 1997 stays taxable. Claimed $40,000 in depreciation over years of renting out the home? That $40,000 is taxed at up to 25% federally, and California taxes it as ordinary income on top. Anyone who converted a rental to a primary residence, or kept a home office, should calculate this carefully before listing.
County and City Transfer Taxes at Closing
California authorizes counties to impose a documentary transfer tax at $0.55 per $500 of value, or $1.10 per $1,000. Cities within those counties can add a tax at half the county rate. In most areas, the combined base rate is $1.10 per $1,000.7California Legislative Information. California Revenue and Taxation Code 11911 On an $800,000 sale, the base tax is $880. The seller typically pays it, though the point is negotiable.
Some cities impose their own transfer taxes that dwarf the base rate. Los Angeles charges $4.50 per $1,000 on sales up to $5.3 million, then 4.45% between $5.3 million and $10.6 million, and 5.95% above $10.6 million. San Francisco’s tiered rates reach 6% on properties over $25 million. Oakland ranges from $10 to $25 per $1,000 depending on price. Berkeley, Culver City, and San Jose have their own tiered structures. Not every city adds a tax, but where it exists, the cost can add thousands or tens of thousands to your closing statement. Check your city’s current schedule before estimating net proceeds.
Withholding From Your Sale Proceeds
California’s 3⅓% Withholding
California requires the buyer to withhold 3⅓% of the total sale price and remit it to the Franchise Tax Board when the price exceeds $100,000.8California Legislative Information. California Revenue and Taxation Code 18662 This is not a separate tax. It is a prepayment toward the California income tax you’ll owe on the gain. Overpay, and the excess comes back as a refund.
Many sellers qualify for exemption by certifying their status on FTB Form 593. The common exemptions:
- The property qualifies as your principal residence under IRC Section 121.
- You are selling at a loss or breaking even for California tax purposes.
- You are reinvesting the proceeds into a like-kind replacement property through a 1031 exchange.
- The seller is a California corporation, partnership, or LLC qualified to do business in the state.
If any of these apply, your escrow officer will have you complete Form 593 at closing to certify the exemption.9Franchise Tax Board. 2025 Form 593 Real Estate Withholding Statement
FIRPTA for Foreign Sellers
If the seller is not a U.S. citizen or resident, federal law requires the buyer to withhold 15% of the total sale price and remit it to the IRS under the Foreign Investment in Real Property Tax Act.10Internal Revenue Service. FIRPTA Withholding Like the California withholding, it’s a prepayment, not an added tax. The foreign seller files a U.S. return and receives a refund of any overpayment. An exemption applies when the buyer intends to use the property as a personal residence and the price is $300,000 or less, though few California sales qualify. Foreign sellers can also apply to the IRS for a withholding certificate reducing the amount if their actual liability will be less than 15% of the sale price.
Deferring Tax With a 1031 Exchange
Sellers of investment or business property can defer the entire capital gains tax by rolling proceeds into another investment property through a 1031 like-kind exchange. This does not apply to a primary residence or to property held mainly for resale.11Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
The timeline is strict. You must identify one or more replacement properties within 45 days of selling the original property, and the exchange must close within 180 days. A qualified intermediary holds the sale proceeds during the window. If you touch the money directly, the exchange fails. The replacement must be “like-kind,” which for real estate is broad: a rental house can be exchanged for an apartment building, commercial property, or investment land.
Watch for boot. If you receive cash back or the replacement property’s mortgage is smaller than the one on the property you sold, the difference is taxable immediately. Full deferral requires reinvesting the entire net proceeds and taking on equal or greater debt on the replacement.
Selling a Home You Inherited
Inherited property receives a stepped-up basis equal to the fair market value on the date of the decedent’s death.12Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent This dramatically reduces taxable gain and often eliminates it if you sell soon after inheriting. If your parent bought a home for $150,000 decades ago and it was worth $900,000 at death, your basis is $900,000. A sale at $920,000 produces a gain of only $20,000.
California follows federal stepped-up basis rules. Get a professional appraisal as of the date of death to fix the basis, especially if time will pass between inheritance and sale. The longer you wait, the more the property may appreciate above the stepped-up value, and that additional appreciation is taxable.
A home inherited from a spouse receives the stepped-up basis on the entire property under California’s community property rules, not just the decedent’s half. That is a significant advantage over common-law states, where only the decedent’s share gets the step-up.
Reporting the Sale and Paying Estimated Taxes
You are not always required to report a home sale federally. Skip reporting only if all three are true: your gain does not exceed the exclusion, you did not receive a Form 1099-S from the closing agent, and you don’t want to elect to report the gain as taxable.1Internal Revenue Service. Publication 523, Selling Your Home In practice, escrow and title companies file 1099-S on most transactions, which means most sellers report the sale even when the gain is fully excluded.13Internal Revenue Service. Instructions for Form 1099-S
When reporting is required, use IRS Form 8949 to detail the sale and Schedule D (Form 1040) to summarize capital gains and losses. If your gain is fully excluded, report the transaction on Form 8949 with the exclusion code and show a net gain of zero.14Internal Revenue Service. Instructions for Form 8949 For California, report the sale on FTB Schedule D filed with Form 540.
A large gain can trigger a surprise estimated tax bill. If you expect to owe $500 or more in California income tax after subtracting withholding and credits, you generally must make quarterly estimated payments to the FTB. Deadlines follow the standard quarterly schedule: April 15, June 16, September 15, and January 15 of the following year. If your California AGI is $1 million or more in the year of the sale, base your estimated payments on your current-year tax rather than using prior-year tax as a safe harbor.15Franchise Tax Board. 2025 Instructions for Form 540-ES Estimated Tax for Individuals Federal estimated tax rules are similar with the same quarterly deadlines. If you close mid-year with a taxable gain, calculate what you owe before the next quarterly deadline to avoid underpayment penalties on both sides.