Capital gains tax is one of the most common questions sellers have, and it’s also one of the easiest topics to get wrong with generic internet advice. This article covers the basics so you know what questions to ask, but it is not tax advice, and you should consult a CPA or tax professional about your specific situation before making any decisions based on tax consequences.
The Basic Federal Exclusion
Under current federal tax law, homeowners who have owned and lived in their home as a primary residence for at least two of the last five years may be able to exclude a significant portion of their capital gain from federal taxes, up to $250,000 for single filers and $500,000 for married couples filing jointly. This is sometimes called the Section 121 exclusion, and it’s the single most important thing most sellers should discuss with their tax preparer.
What Counts as Gain
Your capital gain generally isn’t just your sale price minus your purchase price. It also factors in your original purchase costs, certain capital improvements you’ve made over the years (not routine maintenance or repairs), and selling costs like commissions and closing costs. Keeping good records of major renovations and improvements over your years of ownership can meaningfully reduce your taxable gain, which is another reason to loop in a tax professional early rather than after you’ve sold.
California State Taxes
California does not offer the same capital gains exclusion structure as federal law and generally taxes capital gains as ordinary income at the state level. This means your California tax exposure on a home sale can look quite different from your federal exposure, and it’s an area where a CPA familiar with California tax law is especially valuable.
Investment and Rental Properties
If the property you’re selling is a rental or investment property rather than a primary residence, different rules apply, including potential depreciation recapture and the possibility of deferring gains through a 1031 exchange. These strategies have strict timelines and requirements, so they need to be planned well before you list the property, not after escrow closes.
The Bottom Line
Every seller’s tax situation is different depending on how long they’ve owned the property, how it’s been used, what improvements they’ve made, and their overall financial picture. The right move is always to talk to a CPA or tax attorney before you sell, not after.
Ready to sell and want to loop in the right professionals early? Contact James Malcom to build a sale timeline that gives you room to plan around taxes properly.
