bees -- Double check your citation about exemptions and the 1997 change to cap gain treatment, and notice the citation above from California Publication 1001. Perhaps the article you cited should have more appropriately said "taxable capital gain" instead of merely "capital gain." The essence is that the principal residence sale cap gain exclusion is not included in taxable capital gain, and the exclusion is applicable to both federal and California taxes. In particular, note the sentence from Cal Pub 1001: "California conforms to this provision."
