Yes, selling a home in California can produce a taxable capital gain, but most sellers owe nothing. The California home sale capital gains tax follows the federal rules for a primary residence: a single filer can exclude up to $250,000 of profit and a married couple filing jointly can exclude up to $500,000, and California conforms to that exclusion for state income tax purposes.1Franchise Tax Board. Income From the Sale of Your Home Gain above those thresholds is taxed by the IRS at long-term capital gains rates and by California as ordinary income, which tops out at 13.3%.
Figuring the Gain Before Any Tax
Your gain is the difference between your net sale proceeds and your adjusted basis. Net proceeds are the contract price minus selling costs like broker commissions, escrow fees, advertising, and transfer taxes. Adjusted basis starts with what you originally paid, including purchase closing costs such as title insurance and recording fees, and grows with every capital improvement you added to the property over the years.
The IRS separates improvements from repairs. An improvement adds value, extends the home’s life, or adapts it to a new use; a repair just keeps things running. Replacing a broken window is a repair. Replacing all the windows as part of a renovation is an improvement. Additions, a new roof, central air, a kitchen remodel, new flooring, landscaping, driveways, fencing, and a swimming pool all count. Routine painting, patching cracks, and fixing leaks do not.2Internal Revenue Service. Publication 523, Selling Your Home
Every dollar you can add to basis is a dollar off your taxable gain, so keep the receipts. If you ever claimed depreciation for a home office or rental use, subtract that depreciation from your basis, which raises the gain by the same amount. A loss on a personal residence generally cannot be deducted.
The Exclusion That Wipes Out Tax for Most Sellers
Section 121 of the Internal Revenue Code lets a single seller exclude up to $250,000 of gain, and a married couple filing jointly up to $500,000.3Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence California uses the same numbers.1Franchise Tax Board. Income From the Sale of Your Home If your gain fits inside those limits and you meet the tests below, you owe zero income tax on the sale at both levels.
Two tests decide whether you qualify:
- Ownership: you owned the home for at least two years during the five-year period ending on the sale date.
- Use: you lived in the home as your primary residence for at least two years during that same five-year window.
The two years do not need to be consecutive; you could live there for 12 months, move away, and return for another 12. For a joint return, only one spouse needs to satisfy ownership, but both must satisfy use.3Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence You also cannot have used the exclusion on another sale in the prior two years.
Partial Exclusion for Early Sales
If you sell before hitting two years, a reduced exclusion may still apply when the sale is driven by a qualifying job move, a health issue, or an unforeseeable event. A job-related move qualifies when your new workplace is at least 50 miles farther from the home than your old one. Health-related moves include relocating for medical treatment for yourself or a family member, or selling on a doctor’s recommendation. Unforeseeable events range from natural disasters and condemnation to divorce, job loss, and the death of a spouse.2Internal Revenue Service. Publication 523, Selling Your Home
The reduced amount is prorated. Live there one year of the required two, and you can exclude half: $125,000 single, $250,000 joint. A surviving spouse who sells within two years of their partner’s death can still claim the full $500,000 as long as the couple would have qualified immediately before the death.3Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
Tax on the Gain That Exceeds the Exclusion
Any profit above the exclusion is a long-term capital gain federally, assuming you owned the home for more than one year. Federal long-term capital gains rates run 0%, 15%, or 20% depending on your total taxable income for the year, and high earners owe an additional 3.8% net investment income tax on the taxable portion of the gain once modified adjusted gross income tops $200,000 for a single filer or $250,000 for a joint return.4Internal Revenue Service. Topic No. 559, Net Investment Income Tax Combined, a high-income seller can face 23.8% federally before California takes anything.
California does not offer a preferential rate for long-term capital gains. All capital gains are taxed as ordinary income.5Franchise Tax Board. Capital Gains and Losses The taxable portion of your gain stacks on top of wages, retirement distributions, and every other income source, and the whole amount runs through California’s progressive brackets. For 2026, the top regular bracket is 12.3% on income above $742,953 for a single filer, and an additional 1% Mental Health Services Tax applies to taxable income above $1 million, producing an effective top rate of 13.3%.6Franchise Tax Board. 2025 California Tax Rate Schedules
Consider a married couple with $400,000 in combined wages who sell their Bay Area home for a $900,000 gain. After the $500,000 exclusion, $400,000 is taxable. Their California taxable income lands near $800,000, deep into the 11.3% bracket, and between federal capital gains tax, the net investment income tax, and California income tax, they can owe well over $100,000 on the excess gain alone.
Full-time California residents owe state tax on their entire taxable gain even when the home is in another state. Non-residents owe California tax only on gain from property located within the state.
Withholding at Closing
California requires escrow to withhold 3 1/3% of the total sale price on most real estate transactions and remit it to the Franchise Tax Board on Form 593.7Cornell Law School. California Code of Regulations Title 18, 18662-3 – Real Estate Withholding The percentage applies to the full sale price, not the gain, so the dollar amount can be significant.
Sellers of a principal residence who qualify for the Section 121 exclusion can certify an exemption on Form 593 and avoid the withholding entirely. The form has a checkbox for exactly that.8New York Codes, Rules and Regulations. California Code of Regulations 18662-3 – Real Estate Withholding If your escrow officer hands you Form 593 and you qualify, certify the exemption instead of letting thousands of dollars be withheld unnecessarily. An alternative election on Form 593 lets you calculate withholding based on the estimated gain rather than the full sale price, which lowers the amount when the gain is small relative to the price. Any withholding that does occur is credited against your final California tax liability when you file Form 540.
The Rental and Home Office Trap
Sellers who rented the property or used part of it for business before moving in run into a rule that surprises people. A portion of the gain tied to that “nonqualified use” cannot be excluded, no matter how long you lived there afterward.
The allocation is a ratio: time in nonqualified use divided by total ownership. Own a home for 10 years, rent it out the first four, live there the next six, and 40% of the gain falls outside the exclusion. Only nonqualified use beginning on or after January 1, 2009 counts against you.3Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
Depreciation you claimed during the rental or business period faces its own bill. Federal tax on unrecaptured depreciation on real property runs up to 25%, regardless of your income bracket.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses California taxes the recaptured amount at ordinary income rates along with the rest of the gain. The combined federal and state hit on the depreciation portion alone can exceed 35%.
Foreign Sellers
If you are not a U.S. citizen or resident alien, the buyer must withhold 15% of the total sale price under the Foreign Investment in Real Property Tax Act and send it to the IRS.10Internal Revenue Service. FIRPTA Withholding That comes on top of the California 3 1/3%, so nearly 19% of the price can be held back before closing. An exception applies when the buyer intends to use the property as a residence and the sale price is $300,000 or less.11Internal Revenue Service. Exceptions From FIRPTA Withholding Foreign sellers can also apply for a withholding certificate to reduce the amount when actual tax will be lower. Both FIRPTA and California withholding function as prepayments credited against the final tax bill.
Reporting the Sale
If your entire gain fits inside the exclusion and no Form 1099-S was issued at closing, you don’t have to report the sale at all.2Internal Revenue Service. Publication 523, Selling Your Home If a 1099-S was issued, report the sale on Form 8949 even though nothing is owed, entering the sale price and basis and applying the exclusion as a negative adjustment with code “EH.”12Internal Revenue Service. Instructions for Form 8949
When part of the gain is taxable, report the transaction on Form 8949, apply the exclusion as an adjustment, and carry the taxable gain to Schedule D of Form 1040.13Internal Revenue Service. Topic No. 701, Sale of Your Home Add Form 8960 if the net investment income tax applies. For California, file Schedule D (540) whenever the state and federal gain amounts differ; when they match, the gain flows through federal Schedule D to your Form 540 without a separate state schedule.14Franchise Tax Board. Instructions for California Schedule D (540) Any Form 593 withholding is credited on the Form 540.