If you pay taxes in California, you may be aware that the state taxes capital gains as income and does so at a higher rate than many other states.
Well over 10% of California state revenue is generated by capital gains, but some of those gains are subject to exceptions. If you sell property in California and make less than $250,000 in profit, you may qualify for an exemption.
That’s just one example of why it pays to know your state tax laws, especially where capital gains are concerned.
What follows should not be construed as tax advice or financial advice. Consider this a primer you can use to do more research into your tax options. Tax laws change often, don’t assume last year’s deductions or penalties apply in the current year.
What are capital gains? Generally speaking, these are considered the profit you make when you sell an asset for more than you paid for it. The profit is called a capital gain, and conversely, if you lose money on the sale of an asset you have experienced a capital loss.
This could include Bitcoin, real estate, stocks, or other holdings. Federal capital gains tax laws are not identical to California’s laws. Under federal guidelines, there are differences in your tax liabilities depending on whether you hold an investment long-term or for a short amount of time.
Your capital gains tax burden under federal law may depend on your marital status and tax filing status. California capital gains taxes are also levied on short-term and long-term gains; the amount you pay may vary depending on how long you held the investment.
There may be exceptions for real estate and certain types of retirement accounts, but overall expect capital gains taxes on a “taxable event” such as selling an investment for a profit.
What’s a short-term gain versus a long-term gain? Short-term capital gains are typically investments or assets bought and sold within a given year, and are taxed at a higher rate than the state’s long-term capital gains tax.
Long-term capital gains are profits realized from holding the investment longer and it’s generally thought that this tax setup encourages investment.
Remember the exception for real estate we mentioned earlier? The longer you keep real estate, the more ability you have to defer taxes on the appreciation of your home. If you bought property to flip instead, you could be liable for up to 15% in taxes on the profits from your real estate sale.
If you purchase stock, for example, that rises in value while you hold it, that increased value is known as an unrealized capital gain. In other words, because you have not sold a stock that increased in value, that is viewed as a hypothetical until you actually sell the stock for a profit.
Only then is it subject to capital gains tax, never while you still hold on to the investment. Note that we are NOT discussing any potential dividends paid by the company for investing; this conversation is limited to the specific dollar value of the stock and nothing more.
Capital gains taxes may vary from 1% or as high as 13%. The amount you are taxed may depend on the source of the gains, and where you are on the California State income tax bracket. It will be helpful to get the advice of a tax professional with experience with capital gains if you aren’t sure how to report them.
Remember, tax laws are subject to change and may change more frequently than you realize. It’s best to consult the current year’s state income tax guidance for best results.
If you are in the 0% tax bracket for the State of California, your capital gains tax rates are as follows:
- Single: $0 – $41,675
- Married filing jointly: $0 – $83,350
- Married filing separately: $0 – $41,675
- Head of household: $0 – $55,800
If you are in the 15% tax bracket for the State of California, your capital gains tax rates are as follows:
- Single: $41,675 – $459,750
- Married filing jointly: $83,350 – $517,200
- Married filing separately: $41,675 – $258,600
- Head of household: $55,800 – $488,500
If you are in the 20% tax bracket for the State of California, your capital gains tax rates are as follows:
- Single: $459,750+
- Married filing jointly: $517,200+
- Married filing separately: $517,200+
- Head of household: $488,500+
These numbers are current at press time but should be considered examples; your experience may vary depending on the rules in the current tax year.
There is a formula you can use to estimate your capital gains taxes. Start with the sale price of the asset or investment, and add up your seller expenses and deduct them. You will need to calculate depreciation and deduct it, and multiply any capital gains by the applicable state tax rate. This should be considered an estimate only.
If you own one home in California and use that home as your primary residence, you may be entitled to a capital gains tax exclusion if the sale of that property has a profit of less than $250,000. This applies when the following conditions are met:
- Reside in the property as the primary residence for two years, which must be done within five years of selling the home
- May only have one primary residence
- Have not claimed the exclusion in the last two years
- The profits must not exceed $250K
What kind of properties are eligible for this exclusion? They include:
- Suburban houses
- Mobile homes
- Co-op apartments
Because tax laws change from year to year, you may need the assistance of a tax professional who can help determine your rights and responsibilities under the current tax year. Ignorance of tax laws will not protect you from tax consequences should you fail to pay or file according to the rules.
If you realize you made an error on a past tax filing when it comes to capital gains tax, consult a tax professional about filing an amended return for the tax year in question. You may be able to correct a past mistake or avoid a future audit by doing so. Be sure to gather as much supporting documentation for your amended return as possible to support your claim of an error.