California capital gains tax. What exactly is it capital gains tax and do I have to pay it?
I’ll make this short and sweet, if you’d like to know more then please consult your CPA. I can recommend a great East Bay Area CPA if needed.
When one sells a home for more than they purchased it, there is a capital gain which is the proceeds generated from the sale. In California, one must pay tax on said capital gains. The gains are considered ordinary income come tax time.
However, if the property being sold was the seller's primary residence for at least two years, and they lived in this residence for at least two of the last five years (does not need to be consecutive years), then they are eligible for a capital gains tax exemption. If the seller is single, they're exempt for up to $250,000. Double this to $500,000 if the seller is married to a spouse whom has also lived in the home for two of the five years preceding the sale. Any gains in excess of the aforementioned amounts are required to be reported to the IRS and taxes will be incurred.
Ask your CPA about federal Capital Gains and Losses Schedule D (IRS Form 140) and California Capital Gains or Loss (Schedule D 540) and have them explain them to you in detail.
When one is selling a rental property, investment property, second home, etc., they are on the hook for capital gains tax in California. However, they may wish to sell their investment and purchase a “like kind” property within six months to avoid (prolong) this inevitable taxation. This property must be identified within 45 days of relinquishing the sold property to its new buyer. This is known as a 1031 Exchange.
Please speak with your CPA for details and tax advice. Do not hesitate to reach out to me with any East Bay real estate questions, I'd loved to be your East Bay real estate agent and real estate professional.