Taxes on Selling a House in California: What Homeowners Need to Know in 2025

Taxes on Selling a House in California

Selling a home in California can seriously impact your bottom line, not just because of property taxes or what you pay your real estate agent, but because of how both the state and the federal government tax your profits.

According to the Franchise Tax Board, your filing status and taxable income play a big role in determining what you'll owe. Whether you’re in Northern California or Southern California, staying on top of these requirements is essential for making clear, informed decisions.

Beyond the sales price, you’ll also want to account for costs like title insurance, agent commissions, and escrow fees when calculating your gain. These real estate transaction expenses can help reduce your taxable profit, especially if the home has appreciated significantly since you originally purchased it.

Federal Capital Gains Tax: What Homeowners Need to Know

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What Is Federal Tax on Home Sales?

When you sell a property, the IRS views any profit over your cost basis as a capital gain. How that gain is taxed depends on how long you’ve owned the property.

If you sell within a five year period, specifically, if it’s been less than one year since the purchase, your gain is considered a short term capital gain and taxed as ordinary income. That means it’s subject to your regular federal tax rate, which is often higher than the rate for long-term gains.

Federal Capital Gains Tax Rates for 2025

For homes owned longer than one year, your profit is typically treated as a long-term gain. The federal capital gains tax rates for 2025 are:

0% for low-income earners
15% for middle brackets
20% for high earners

Your actual rate depends on your filing status, for example, single filers may hit the higher threshold faster than those married filing jointly. This exclusion is only available to homeowners who meet the two-out-of-five-year rule for using the home as a primary residence.

Federal Capital Exclusions: The $250K/$500K Rule

Qualifying for the Federal Capital Gains Exclusion

Single taxpayers may exclude up to $250,000, while married couples filing jointly may exclude up to $500,000. To qualify, the home must have been your primary residence for at least two of the previous five years. This maximum amount can significantly impact your tax return.

Exceptions and Partial Exclusions

Even if you haven’t met the two-year requirement due to sudden job relocation, health issues, or other circumstances, the IRS allows a prorated exclusion amount. This helps married taxpayers and single taxpayers alike reduce taxable gains.

California Capital Gains: What Makes It Different?

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How California Capital Gains Are Taxed

In the Golden State, any profit you make from selling your home is considered regular income and taxed accordingly. Unlike the federal system, California doesn’t distinguish between long term capital gains and short-term ones. Whether you’ve owned the home for two years or twenty, your gain is taxed at your personal income level, with rates climbing up to 13.3%. That’s why many homeowners are surprised to learn that even assets held for years are still taxed like a paycheck when it comes to state rules.

The Franchise Tax Board requires you to report all gains, and since there’s no exclusion similar to the federal $250K/$500K rule, it’s essential to understand how this affects your net proceeds, especially when combined with property taxes, local transfer taxes, and documentary transfer tax charges.

Transfer Taxes, Documentary Transfer Tax & Other Expenses

In California, it’s not just income tax you have to think about, there are local fees too. Most cities and counties impose a transfer tax, and places like San Francisco charge an additional documentary transfer tax based on the home’s sale price. These can add thousands to your closing costs.

You’ll also need to factor in settlement fees, title fees, and a variety of selling expenses, from professional staging to inspection repairs. While these don’t directly reduce your tax bill, they can lower your overall capital gain if calculated properly. Always keep detailed records and consult with your tax advisor to make sure you're accounting for everything that can reduce your taxable gain.

Real Estate Withholding and State Oversight

California may require escrow to withhold a portion of the sale proceeds, either 3⅓% of the sales price or 12.3% of the gain. Unless you submit Form 593 showing you qualify for a primary residence exemption, the state will hold these funds. Even expatriate tax considerations apply if you're a U.S. taxpayer living abroad.

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How to Calculate Your Gain and Avoid Surprises

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Your Cost Basis & Home Improvements

Your cost basis starts with the price you bought your home for and increases with home improvements, like new HVAC or a room addition. Keep records. You can also deduct selling expenses which include settlement fees, title feesand other expenses that will reduce your taxable gain.

Step-by-Step Capital Gain Example

Purchase price: $400,000
Home improvements: $60,000
Adjusted basis: $460,000
Sale price: $850,000
Capital gain: $390,000 For married filing jointly, you are fully excluded federally. But California treats the full gain as income, taxable at state tax rate.

Tax Saving Strategies When Selling Your Home

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Use Home Improvements to Reduce Taxable Gain

Well documented improvements reduce your tax liability. Talk to a tax pro to make sure you’re including all eligible capital improvements.

Time Your Sale to Max Out Exclusions

Waiting just a few months to hit the two year mark can mean the difference between no tax and a big liability. This timing is especially beneficial for married filing taxpayers.

Consider a 1031 Exchange for Investment Properties

If you’re a landlord or investor you can defer your gain through a 1031 exchange and reinvest into similar property. This doesn’t apply to primary residences but is powerful for real estate portfolios.

Look into Installment Sales or Opportunity Zones

Ask your tax advisor about installment sales or investing in low-income Opportunity Zones, these can spread or defer gains especially useful for ex-uniformed or folks in the intelligence community who have to move unexpectedly.

Frequently Asked Selling a House in California and Tax Implications Questions

How much tax will I pay if I sell my home in California?

It depends on your gain, how long you’ve held the home, and your eligibility for exclusions. All gains are income in California, taxed from 1%–13.3%, while federal taxes depend on your federal tax rate and filing status.

Do I need to report the sale of my home?

Yes. Use IRS Form 8949 and Schedule D. You’ll also need to file a return with the Franchise Tax Board, regardless of how much you owe.

Can I avoid taxes by buying another house?

No. The federal rollover rule is gone. But buying another property doesn’t affect your exclusion eligibility, as long as you met the use and ownership criteria.

What if I inherited the home?

When you inherit a home, its value is usually adjusted to match what it was worth at the time the original owner passed away, this is called a step-up in basis, and it can significantly reduce the amount of taxable gain if you decide to sell. This often eliminates most or all capital gains tax when sold.

What if I don’t meet the two-year rule?

A partial exemption is possible in cases like relocation, health issues, or unforeseen circumstances. Anything over the prorated gain may be taxable.

Can I deduct closing costs when calculating my capital gain?

You can’t take them as direct tax deductions, but closing costs, like settlement fees, title fees, and real estate agent commissions, reduce your capital gain by lowering the final net proceeds.

How does filing jointly impact capital gains tax on a home sale?

Married couples filing jointly can exclude up to $500,000, while single taxpayers can exclude $250,000. To qualify, living in the home for at least two of the prior five years is required.

Are there transfer taxes in California?

Yes. You’ll likely face documentary transfer tax and transfer taxes paid at sale. Every county sets its own rate, and large cities like San Francisco often charge extra per $1,000 of fair market value.

How do property taxes factor into my sale?

In California, property taxes are annual and prorated at closing. They don’t affect capital gains directly but impact overall selling expenses and real estate transactions.

How Property Sales Group Helps You Navigate Taxes and the Selling Process

At Property Sales Group, we understand the complexities, from federal capital gains to Franchise Tax Board filings and local transfer tax calculations. We offer upfront transparency so you know what your net proceeds look like before you accept an offer. No commissions, no surprise invoices, just a fast, fair solution tailored for Northern California or Southern California home sellers.

Whether you're a married couple, a single taxpayer, or a displaced intelligence community professional relocating under assignment, we’ve guided homeowners through real estate transactions across the Golden State.

Final Thoughts: Understanding Taxes Before You Sell

Selling your home doesn’t need to be taxing, if you know the rules and plan ahead. From home improvements and selling expenses to married filing benefits and understanding federal tax versus state tax rate, you can protect more of your equity.

Always consult a tax professional for complex situations. And when you're ready to sell without delays, skip the open houses and hire Property Sales Group. We offer clarity, convenience, and care every step of the way.

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Taxes on Selling a House in California: What Homeowners Need to Know in 2025