If you’re preparing to sell your home in Los Angeles’ extremely competitive real estate market, you need to be aware of how the state’s capital gains tax policies can affect you. As you gain equity in your home, your potential tax exposure increases greatly.
Capital gains taxes are levies that are due when you sell an asset for more than what you paid for it. They apply to real estate, stocks and bonds, and other big-ticket investment items. All taxpayers must report gains and losses from their sale or exchange of capital assets.
California’s capital gains tax rate is on the higher end of the national spectrum. Depending on your income and other factors, capital gains tax rates can end up anywhere from 1-13.3%. It’s always important when selling luxury real estate to thoroughly understand the capital gains tax policies in your state and note which exemptions apply to you.
Calculate your capital gains
To figure out your anticipated capital gains, subtract the amount you paid for your home from your current asking price. This difference amounts to your overall capital gains obligation. However, it’s likely that you won’t have to pay capital gains taxes on this entire sum of money as a resident of California. The state has a few exclusionary policies that help sellers in the luxury real estate market, and exclusions can radically change the amount you must pay in California capital gains taxes. Staying up-to-date and in the know about changes to capital gains taxes is vital to make smart, savvy financial decisions, especially when considering President Joe Biden's proposed plans to potentially double capital gains taxes for certain investors.
Exclusions for individuals and couples
As the California Franchise Tax Board explains, the California state government conforms to IRS rules and allows residents to exclude the capital gain on the sale of their home if the gain is $250,000 or less, so long as you have not used this exclusion in the last two years, and you have occupied and owned the residence for at least two of the past five years. Any gain over $250,000 is taxable. Your taxable capital gain amount can be calculated by subtracting $250,000 from your total capital gain. The final difference is what you will owe in taxes.
Your relationship status can also impact what you can exclude from your capital gains taxes. Couples, who file their tax returns as registered domestic partners or spouses, can exclude up to $500,000 in gains from their taxable income (as long as both spouses/RDPs meet the two-out-of-five-year ownership requirement and neither spouse/RDP excluded their capital gain from the sale of another home in the last two years). Any gain over $500,000 is taxable. In this case, your taxable capital gains amount can be calculated by subtracting $500,000 from your total capital gains. The final difference is what you will owe in taxes. There are more exclusions that can lower the amount on which you are required to pay capital gains taxes.
Cost of repairs
In many cases, homeowners will have made improvements and significant repairs while residing in a home. Those expenditures can be added to the base cost of their house and will further reduce the amount of capital gains taxes they will have to pay. The state has a list of qualifying improvements, renovations, and repairs that you can use as a guide to understanding what home upgrades will qualify for a tax exemption.
This exclusion only applies to your primary residence, not an investment property or a second home. You also won’t be able to claim the exemption if you didn’t live in the home for at least two of the previous five years.
Hire a pro
Like the home selling process itself, California capital gains taxes can lead to confusion and frustration. Your best bet in any real estate transaction is to hire a seasoned real estate agent who knows California’s market and the complexities of closing a sale. Your agent should be able to explain the listing process to you in great detail and help you understand your potential capital gains tax burden. You should also plan to sit down with a tax attorney to make sure you have all of your bases covered.
When it’s time to list your luxury Los Angeles-area home for sale, contact Dean “Dino” Mandile for local expertise and trustworthy customer service.