How Much Tax Do You Pay When You Sell Your House In California?
Taxes are not the area where you want corners to be cut. Every T is supposed to be crossed and every one I should be dotted. Your listing agent can help you through a lot of the process, as they will be familiar with local laws and procedures, and will probably even know the names of the best local offices to contact for handling everything that comes up while selling your home.
It's always good to have an idea of what's ahead of you, so let's go over some things that come up while you're selling your home in California.
The Capital Gains Tax in California
Capital gains tax charges you on the difference between the amount you paid for the asset (this is known as the basis) and the amount for which you sold the asset. This tax may apply to a number of different types of investment, such as stocks and bonds, or to assets such as boats, cars and real estate. The amount you earned between the time you bought the property and the time you sold it is your capital gain.
The IRS charges you a tax on your capital gains, as does the state of California through the Franchise Tax Board, also known as the FTB. The exemption is $250,000 for single taxpayers. Married taxpayers have a double exemption for a $500,000 exemption. This means that if you bought a home for $300,000 and sold it for $900,000, you 'd have a capital gain of $600,000. But if you're married, your exemption is $500,000 of that amount, so you'd have a capital gain of $100,000 that you'd need to pay taxes on.
There are a few things that could disqualify you from the capital gains exemption. For example, if the house was not your primary residence. If this is an investment property or a second home, you will not qualify for a tax exemption on capital gains.
Other things that might disqualify you from the exemption:
- In the five years before you sold the property, you didn’t live in it for at least two of those years. If you are in the military, disabled, or in the intelligence community, then this rule doesn’t affect you. You still qualify for the exemption.
- You owned the house for less than two years.
- You are paying expatriate tax.
- You bought the house through a 1031 exchange in the past five years.
How to Figure Out Your Capital Gain
A few pieces of information are needed to figure out your capital gain. These include the original purchase price of the home, the commissions you paid at that time, the current purchase price of the home, and any improvements made to the home during the time you owned the home. You will need to have receipts for these costs. Take the current home purchase price and subtract what you originally paid commissions and all the home improvements that you have on paperwork to prove you have paid for. Then, if you qualify for an exemption, subtract the amount. What's left is the amount of money you 're going to need to pay tax on capital gains.
You have been paying property taxes every year as a homeowner. Depending on the time of year, you may have paid property taxes in advance or paid property taxes in advance. This can be negotiated with the purchaser during the sale. If you have property taxes that are not paid, they may be pro-rated until the end of the escrow. If you have paid in advance, you can negotiate a pro-rated amount from the date of sale with the purchaser.
This tax is usually paid to the county, but sometimes to the city, depending on where you are located. The cities of Los Angeles, Riverside, and San Francisco are collecting their own city transfer taxes. You'll need to check with your local real estate broker or city to see if your city has a transfer tax and how much that tax is.
As is typical for closing costs, it is negotiable who pays the transfer tax. That said, there are industry standards in different regions. In Northern California, it's usually the buyer who pays the transfer tax. It's usually the seller who pays in Southern California. Your listing agent will be able to tell you what the standard is in your area.
Everything Will Need to Be Handled in Writing
All real estate transactions are subject to paperwork. To ensure that things are handled correctly, the state of California has real estate legislation that requires that everything be dealt with in writing. This protects the seller from liability on the road and makes everything clear so that you can deal with the sale of your property and do so, as opposed to the prosecution of miscommunication on the road.
Find the real estate agent you trust, and they're going to be able to walk you through the procedures for selling your property. They can handle the paperwork, refer you to a real estate lawyer, and inform you about taxes and other issues you need to deal with along the way.