California tax on property sell

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I know that if I have lived in my home for at least two years in the state of California and I sold it with a gain, that I my wife and I together have an exemption from any federal income tax on the gain for up to 500k. This home was never a rental and always our primary residence. My question is about that tax on the gain for the state of California. Since we are exempt from Federal Income Tax, are we also exempt from the State of California Income Tax on any gain or is there still a tax on the gain and if so, how would it be taxed? As income tax, or as a long term capital gain tax?

Thanks for the help.

TurboTax Home & Biz Windows

CalCountryAnswer

Level 6

Yes, you are missing something. And wow, did you get some erroneous advice! Don't overthink this problem. Your discussions with "Timothy" appear focused on the concept that California taxes capital gains as ordinary income. That is true. However if a capital gain is excluded from your federal Adjusted Gross Income, in most cases it does not result in taxable income for California. Timothy appears to have missed entirely your mention that the property being sold is your personal residence.

Notice a statement in one of Timothy's answers which is absolutely absurd:
"No, it would not impact the tax on your gain, if you turn around to buy another house"

That statement is an out-of-date reference to a long-since repealed federal capital gain exemption if one purchased a new home of greater value within a certain time frame. In 1997, the handling of federal capital gain on the sale of one's principal residence was changed to the current approach. Currently, subject to certain requirements the first $250,000 (and in most cases $500,000 if married filing jointly) of capital gain on the sale of a principal residence is excluded from taxation. As mentioned before, California conforms to (is consistent with) the federal provision.

Notice that due to the requirement of occupying the house as a principal residence for at least any two years out of the last five years prior to sale to qualify for the cap gain exclusion, by definition the sale results in a federal "long-term" gain on the sale, only some of which may be taxable. Also note the presumably unfair provision that while a gain may be taxable, a loss on the sale of your principal residence is not a deductible loss.

Lastly, please remember that the California income tax process begins by taking your federal Adjusted Gross Income (AGI) and your federal itemized deductions, then makes additions and/or subtractions to each as required based on differences between federal and California tax law. Any adjustments to your federal information are shown on your California Schedule CA(540), which details the various additions and subtractions, if any, to your federal data.

See the following passage on page 10 of the 2017 edition of California's FTB Publication 1001 at:
https://www.ftb.ca.gov/forms/2017/17_1001.pdf

"For sale or exchanges after May 6, 1997, federal law allows
an exclusion of gain on the sale of a personal residence in
the amount of $250,000 ($500,000 if married filing jointly).
The taxpayer must have owned and occupied the residence
as a principal residence for at least 2 of the 5 years before the
sale. California conforms to this provision. However, California
taxpayers who served in the Peace Corps during the 5 year
period ending on the date of the sale may reduce the 2 year
period by the period of service, not to exceed 18 months."

M

mike4Author

Level 2

Thank you CalCountry for the thorough and detailed answer. That was very helpful. So from what I read is that the gain made on the sale of the personal residence that falls under the exemption rules of the Federal Tax Code will not make it across to the California Tax Form thus the gain will not be taxed. However, any gain that is not exempt by the Federal exemption (therefore getting taxed Federally) will also make it to the California Tax Form and thus be taxed as a Capital Gain (i.e. income tax) in the state of California. Am I understanding this correctly?

CalCountry

Level 6

Just to be sure, here is one last clarification. Capital gains that are taxable (that is, capital gains beyond what is exempted for a principal home sale), will be included in your federal AGI which transfers to the California tax return. There is no special California "capital gains" tax rate for taxable capital gains, so California treats taxable gains as ordinary income and they are taxed as such.

B

burkintax08

Level 2

As an addendum to this thread, can a married couple take advatage of the $500k capital gain tax exemption upon sale of their primary residence when one of them only is listed on the home's title?
I bought our home over a decade ago and have lived in it continously as primary residence. Upon our marraige over 5 years ago, my spouse joined me in the home, though the title is still in my name. No other property sales have occured in over a decade. And does the answer apply both at the Federal level and in California?

Thank you in advance for your reply.

R

RobertB4444

Alumni - Intuit

Yes. It was your spouse's primary residence for all of that time. You can take the full marriage exclusion both federally and in California.

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M

mike4Author

Level 2

Thank you for your time and making things clear. Yes, that is how I now understand it. Very appreciative of your expertise.

CalCountryAnswer

Level 6

Yes, you are missing something. And wow, did you get some erroneous advice! Don't overthink this problem. Your discussions with "Timothy" appear focused on the concept that California taxes capital gains as ordinary income. That is true. However if a capital gain is excluded from your federal Adjusted Gross Income, in most cases it does not result in taxable income for California. Timothy appears to have missed entirely your mention that the property being sold is your personal residence.

Notice a statement in one of Timothy's answers which is absolutely absurd:
"No, it would not impact the tax on your gain, if you turn around to buy another house"

That statement is an out-of-date reference to a long-since repealed federal capital gain exemption if one purchased a new home of greater value within a certain time frame. In 1997, the handling of federal capital gain on the sale of one's principal residence was changed to the current approach. Currently, subject to certain requirements the first $250,000 (and in most cases $500,000 if married filing jointly) of capital gain on the sale of a principal residence is excluded from taxation. As mentioned before, California conforms to (is consistent with) the federal provision.

Notice that due to the requirement of occupying the house as a principal residence for at least any two years out of the last five years prior to sale to qualify for the cap gain exclusion, by definition the sale results in a federal "long-term" gain on the sale, only some of which may be taxable. Also note the presumably unfair provision that while a gain may be taxable, a loss on the sale of your principal residence is not a deductible loss.

Lastly, please remember that the California income tax process begins by taking your federal Adjusted Gross Income (AGI) and your federal itemized deductions, then makes additions and/or subtractions to each as required based on differences between federal and California tax law. Any adjustments to your federal information are shown on your California Schedule CA(540), which details the various additions and subtractions, if any, to your federal data.

See the following passage on page 10 of the 2017 edition of California's FTB Publication 1001 at:
https://www.ftb.ca.gov/forms/2017/17_1001.pdf

"For sale or exchanges after May 6, 1997, federal law allows
an exclusion of gain on the sale of a personal residence in
the amount of $250,000 ($500,000 if married filing jointly).
The taxpayer must have owned and occupied the residence
as a principal residence for at least 2 of the 5 years before the
sale. California conforms to this provision. However, California
taxpayers who served in the Peace Corps during the 5 year
period ending on the date of the sale may reduce the 2 year
period by the period of service, not to exceed 18 months."

B

Bees

Level 7

source removed- out of date information"

(reason 422 why I'm not moving to CA)

Disclaimer: Not a tax professional. Information gathered from internet links. Anything dated in June 2019 was posted in prior years and is before the 2019 limits and changes.

CalCountry

Level 6

California conforms to the requirements, exemptions, and limits embodied the federal regulations.

M

mike4Author

Level 2

Unfortunately I don't believe this is correct, unless I am missing something.  I just chatted with the California Tax Board on their Website and this is a paste of my chat.  From what they say, there are no exemptions on any gain received on the sell of residential property--it is all taxed as ordinary income in the state of California.  Please read and give me your feedback.Chat from California State Tax Website

I am selling my personal residence in California. I have lived in it for more than two years. The gain is less the 100K so I know that I am exempt from Federal tax on this, but was wondering what the California tax would be on this gain. Thanks for the help.
Mike • 1:57 PM
You are now chatting with Timothy
Hello. This is Timothy at Station Number # 2124.
Timothy • 1:58 PM
Hello
Mike • 1:58 PM
Is this a gain or loss?
Timothy • 1:59 PM
Gain
Mike • 1:59 PM
Hello?
Mike • 2:00 PM
California does not have any special tax rates on capitol gains, capitol gains is treated as normal income so it would be subject to the normal tax rate of income earn in California
Timothy • 2:01 PM
So there is no exemption as there is for Federal Tax in regards to any gain in selling a residential property?
Mike • 2:02 PM
What if I use the gain to purchase another residential property, does this have an impact on the tax?
Mike • 2:03 PM
Capital gains are taxed at the same rate as ordinary incomeregardless of the holding period of the asset.
Unlike federal law, California treats capital gains as ordinary income and does not give favorable lower rates to capital gains. The amount of California tax is not dependent on the holding period because there is no distinction between long-term and short-term capital gains.
Timothy • 2:03 PM
No, it would not impact the tax on your gain, if you turn around to buy another house
Timothy • 2:04 PM
Ok.  I appeciate your help with this.  To make sure I understand this correctly if my gain was 50,000 and my AGI was 100,000 for California, then the 50,000 gain would be stacked on top of the 100,000 AGI and taxed according to the State Income Tax Rate.  Is that correct in a simplified way?
Mike • 2:05 PM
That is correct, you understand it   [Edit added 04/20/18 by a SuperUser ... Wrong!  That is NOT correct.]
Timothy • 2:07 PM
Great.  Thanks for the help.  California is making it harder and harder to live here! :-).  Is there a way for me to print this out for my future reference?
Mike • 2:07 PM
No, but you can copy then paste this chat into MS Word or Note Pad to save then print out
Timothy • 2:08 PM
Very good that is what I will do.  Thanks.
Mike • 2:08 PM
If you have no further questions, I will disconnect this chat in 2 minutes. Once the session is closed you will not have access to the chat
Timothy • 2:08 PM