Tax Implications of Selling a House in California

Reviewed by: Brandon Brown

Selling a home can be a significant milestone, especially in California’s unique real estate market. Many homeowners consider a “For Sale By Owner” approach to save on real estate agent fees, but understanding what FSBO is also means being prepared to manage all aspects of the sale, including the tax implications of selling a house. You might ask yourself, “How much will I actually keep after taxes?” or worry about missing key deductions or facing surprise fees. Whether you’re selling your house as a primary residence or an investment property, California’s tax law has specific rules, exemptions, and potential deductions that could impact your taxable income. But don’t worry. Our guide will walk you through the tax side of selling your home in California, covering everything from capital gains exclusions to potential deductions. With a bit of planning and research, you’ll feel prepared and confident to make the most of your sale!

Understanding Capital Gains Tax

Capital gains tax is simply a tax on the profit you make from selling a capital asset, like real property. When selling a house, understanding the capital gains tax rate is crucial, especially since it directly impacts how much you’ll keep after the sale. Here’s where it gets a bit better: the Internal Revenue Service (IRS) offers a capital gains tax exclusion for primary residences. Now, if you’re single, you can exclude up to $250,000 of your sales profit from taxes, while married couples filing jointly can exclude up to $500,000. This exclusion isn’t automatic, though. It applies if you’ve used the home as your primary residence for at least 2 out of the last 5 years. Understanding California’s additional requirements and regulations can help you feel secure and maximize these tax benefits, ensuring that you make the best financial decisions when selling your home.

California-Specific Tax Considerations

Selling a home in California isn’t quite like selling in other states. California has its own approach when taxing profits from home sales, which makes it important to understand the state’s unique rules, like the following:

Ordinary Income Tax on Gains – Unlike some places that give homeowners a special lower rate on profits from home sales (called capital gains), California treats these profits as regular income. This means they get added to your annual earnings, potentially bumping you into a higher tax bracket than before.
Extra Reporting with the Franchise Tax Board (FTB) – California’s tax agency, the Franchise Tax Board (FTB), has its own set of rules for home sales, including detailed reporting. Paperwork may include, withholding requirements, information forms, and income reporting. Staying on top of these requirements is the trick to avoiding any surprise fees or penalties.
Withholding for Out-of-State Sellers – If you’re not a California resident but you’re selling property here, the state may withhold some of the sale money up front to cover any taxes you owe. Non-residents should keep this in mind so there are no last-minute surprises.
Federal-Only Exemptions – California doesn’t offer state-level tax breaks apart from the federal government’s capital gains exclusion for primary residences. So, if your home doesn’t qualify for the federal exemption, you’ll probably be paying California taxes on your sale gains.

Knowing these California-specific details can help you avoid any bumps in the road, resulting in a smoother transaction and fewer unexpected costs.

Tax Deductions for Home Sellers

When you sell your home, certain costs, like real estate agent fees, closing costs, and home improvement expenses, can often be deducted from your taxable income. This can help lower your capital gains tax liability or the amount of capital gains tax that you owe. If you’re selling a house that needs repairs, note that expenses that increase your home’s value, such as renovations or landscaping, can be added to your cost basis (the original price you paid for your home). By increasing this amount, you reduce the profit you’re taxed on, which means you keep more from the sale! By maximizing these deductions, you can reduce your tax obligations and keep more of your sale proceeds.

Handling Tax on Investment Properties

When selling a rental property or an investment property, the taxes work differently in comparison to when you sell your primary residence or house. Profits from selling a rental or investment property are usually taxed at the long-term capital gains rate (if you’ve owned it for more than a year). This creates a higher tax liability compared to a primary residence, where the capital gains exemption does not apply.

Using the 1031 exchange

But don’t fret just yet. There’s a way to legally defer those taxes with what’s called a 1031 exchange. This lets you reinvest the sale profits into another similar property without paying taxes right away. By deferring taxes, you can keep growing your investments and even use them as part of your estate planning. Just remember that specific rules apply, such as strict timelines, so planning ahead with a tax professional can help you make the most of this opportunity.

Planning Ahead for Taxes on Sale

Planning ahead for the tax side of things can make a big difference in how much you get to keep from the sale of your home. Provided the information we gave out earlier, you can minimize your tax bill by:

Timing the Sale Wisely (when income is lower or by the end of the tax year)
Using the Primary Residence Exclusion
Adding Deductible Selling Expenses
Planning a 1031 Exchange for Investment Properties

Being proactive about these strategies can mean less stress and a higher take-home from your sale. Starting early and exploring your options can help keep your tax bill as low as possible.

Common Mistakes to Avoid

There are a few common missteps that can make the taxes on your home sale more complicated or expensive than they need to be. Here’s what you should watch out for:

Skipping Cost Basis Adjustments – When calculating taxes on your sale, you’ll want to consider what’s called your “cost basis,” which is basically the original price you paid plus any significant improvements you’ve made. If you don’t include these upgrades in the calculations, it makes it look like you made more profit than you actually did, which can lead to a higher tax bill.
Missing Out on Deductible Selling Expenses – Other costs directly tied to selling your home, like real estate agent fees, title insurance, and closing costs, are often deductible. Missing these deductions also means you might end up with a higher taxable amount, so it’s worth factoring them in.
Overlooking Mortgage Interest and Property Taxes – Until the point of sale, the mortgage interest and property taxes you paid can reduce your overall taxable income. Forgetting to deduct these can result in paying more than what is necessary.
Making Reporting Mistakes – Errors in reporting, especially when filing with the IRS or the California FTB, can lead to audits or even fines. Double-checking all your figures before filing is an easy way to stay clear of any red flags with tax authorities.

By avoiding these common errors, you’ll set yourself up for a smoother, more profitable sale and avoid tax-related headaches down the road. And when things don’t go as expected, knowing what to do if a house won’t sell is important so you can make changes to avoid additional holding costs and capitalize on California’s specific tax exclusions.

Ready to Simplify Your Home Sale? Let FlipSplit Help Maximize Your Profits

Selling a house in California brings unique tax considerations, from understanding capital gains and income tax to navigating state-specific rules. The process can feel overwhelming, but with FlipSplit by your side, you don’t have to go through it alone. With us, there’s no need to worry about costly repairs, hidden fees, or showings. We buy your home “as-is,” handle all the necessary renovations, and even split the resale profits with you—meaning you benefit from the increase in value without lifting a finger. Our team understands the unique Southern California real estate market and works to get you a fair cash offer quickly, backed by our commitment to transparency. With zero commissions, closing costs, or last-minute reductions, we put your needs first, making sure you walk away with as much of your home’s true value as possible. If selling your home without the usual stress and maximizing your profits sounds good, FlipSplit is here to make it happen!

Reviewed by: Brandon Brown

As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.