What are the tax consequences of selling a house in California? If you sell a home in Orange County you may be subject to federal and local taxes.
What should you expect from federal and state tax law? We’ll cover both below, starting with the federal income tax implications. What follows is not tax advice, but rather an idea of what to expect should you sell your California home.
Tax laws are subject to change and what follows is current at press time. But your experience may vary depending on the current tax year and it is best to seek the advice of a tax professional if you aren’t sure what applies in the current year.
The IRS requires taxpayers to report capital gains and losses from the sale of real estate. If you sell your primary residence and earn a profit, the IRS has in the past allowed a deduction of up to $250,000 as an individual tax filer or up to $500,000 when filing a joint return. You must own and use the home as your primary residence for at least two of the last five years.
IRS rules in this area also add that if you “receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions,” you are required to report the gains from the sale even if they are deductible.
Do not expect to be given an exception to capital gains taxes as described above for investment property you have not used as a primary residence (see above).
You also cannot claim this exemption if, as the IRS official site states, you have claimed another capital gains exemption from the sale of a home two years or less from the sale of the current property.
There are a variety of tax implications associated with selling a house in California. Before you sign the papers on your Orange County sales contract, you should know about the following tax issues.
The State of California taxes capital gains as income. Capital gains are basically the difference between what you paid for your home and what you sold it for. In California, you could be liable for a capital gains tax from one percent up to 37% depending on the nature of the gains and the price tag.
You can estimate your capital gains tax if you have the following information in addition to the percentage you’ll be taxed at:
- Original purchase price
- The amount of any commissions paid at purchase time
- Current purchase price of the home
- Cost of any improvements made to the home while you owned it
You may be required to furnish receipts for this information. To run your calculation, take the purchase price you have set for the home, subtract the original price, any commissions, and home improvements, and subtract any amount you may be eligible to exempt. The amount left over may represent your tax liability.
You can (generally) use the IRS guidelines for capital gains in the context of reporting state capital gains taxes but it will be necessary to discuss doing so with a tax professional as tax laws frequently change and yesterday’s deductions aren’t necessarily applicable today.
The State of California does not collect property taxes, but your city, county, or local government does. The tax implications of selling your home in California are in part associated with Proposition 13, which requires a new assessment when the home is sold.
The property taxes paid when the home is purchased do not necessarily represent the property tax the new owner will pay. That does not necessarily affect you as a house seller. But something else does.
Proposition 13 requires your property to be assessed again if there is new construction. The assessment of the new construction may or may not add to your property tax burden. This doesn’t automatically affect a seller unless they decided to start new construction on the property ahead of putting the home on the market.
If you are trying to add value to the home with an addition, a mother-in-law unit, or another type of accessory dwelling unit, that construction may be evaluated and given an assessment that does not affect the other unimproved parts of your property.
When you sell the home it is possible there may be unpaid property taxes, partially paid property taxes, or you may have advance payments already made on those taxes.
You may be able to negotiate around these issues with the buyer using a prorated approach and funds held in escrow. It is smart to get all of these arrangements in writing so that everyone knows who pays for what and when.
When selling a home in California you may be subject to a transfer tax levied by the city or county where the sale happened. You may need to call your real estate agent or lender to learn what applies where you are selling or transferring the home.
Who pays this tax depends greatly on the housing market. While it’s true that buyer and seller can negotiate who pays this tax, in some parts of the state the seller traditionally pays while in other parts of California the buyer traditionally handles the transfer tax.
Different regions have different industry standards. 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.
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Joe Wallace has been covering real estate, mortgage and financial topics since 1995. His work has appeared on ABC, The Pentagon Channel, Veteran.com plus a variety of print and online publications. He is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.