Capital Gains Tax-Do You Qualify for an Exemption?

• Real Estate Tips
• October 3, 2023

What is the California Capital Gains Tax?

If you are a resident of California, you have likely heard about the Capital Gains Tax, which indicates that any “gain” over 500,000 is considered to be taxable. This includes the sale of your home!  

Before you sell your home, it is important to learn more about the capital gains tax and the possible ways you can be exempt from paying it. Keep reading to learn more!

Do I Qualify for an Exemption from the Capital Gains Tax?

Both the IRS and the Franchise Tax Board provide a capital gains tax break for home sellers who meet certain conditions.

You may qualify for an exemption from the Capital Gains Tax if you meet certain criteria, such as being over the age of 55 or being disabled. Additionally, if you sell your primary residence, you may be able to deduct up to $250,000 of your capital gain as a  single filer or $500,000 for a married couple filing.

If you are thinking about selling your home, consider the fact that the following criteria must be met in order to qualify for the full exclusion amount under IRS Publication 523:

• The home that you plan on selling must be your primary residence.
• Additionally, you must have owned the home for at least two years in the five-year period after closing before selling it. The years you’ve lived in it don’t need to be consecutive. Certain exceptions to this rule are made for those who are disabled or those in the military, Foreign Service, intelligence community, or Peace Corps.

• During the last five years, if you acquired the house through a like-kind exchange (also known as a Section 1031 exchange), you will not qualify for an exemption. This is the process by which you swap one investment property for another.

• If you haven’t claimed the exclusion on another home in the last two years, expatriate tax applies to you (a government fee paid by those who renounce their citizenship or move to another country).

What if I Don’t Meet all of the Requirements for an Exemption?

If you don’t meet all of the necessary criteria for an exemption, you may still qualify for a partial exclusion of gain, with reasons being a change of workplace location, health issue, or unforeseeable event. Since the tax process can be quite difficult to understand as a novice, it is typically recommended to seek out more information about capital gains taxes with the IRS or your tax advisor before you decide to sell a property.