Do I pay capital gains tax when I sell my house in California?

Last updated August 19, 2026

By Kurt Mellinger, Principal Agent, Ascension Estates at Equity Union Real Estate. DRE #02238998.

You pay tax only on the gain above your exclusion. If you owned the home and lived in it as your main home for at least 2 of the 5 years before the sale, federal law lets you exclude up to $250,000 of gain, or up to $500,000 if you are married filing jointly and both spouses meet the use test. California conforms to that same exclusion. Anything above it is taxable on both returns.

The exclusion, and the two tests you have to pass

The rule is Internal Revenue Code Section 121. The IRS explains it in Publication 523. It has two tests, and you have to pass both.

• The ownership test. You owned the home for at least 2 years during the 5 year period ending on the date of sale.
• The use test. You lived in it as your main home for at least 2 years during that same 5 year period.

The 2 years do not have to be one continuous block. They do not have to be the same 2 years for both tests. You need 24 months of use in total inside that 5 year window.

There is a third rule that catches people who move often. You cannot use the exclusion if you already excluded gain from the sale of another home during the 2 year period ending on the date of this sale.

For a married couple filing jointly to take the full $500,000, either spouse can meet the ownership test, but both spouses have to meet the use test, and neither can have used the exclusion in the last 2 years.

If you fail a test because of a work move, a health reason, or another unforeseeable circumstance the IRS recognizes, you may still qualify for a reduced exclusion based on the months you did have. That calculation is in Publication 523. Have your CPA run it.

California conforms, then taxes the rest as ordinary income

California follows federal law on the exclusion. The Franchise Tax Board's own guidance says California and federal laws are the same on the sale of a main home, so the gain you exclude federally is excluded on your state return too.

What California does not do is give capital gain a lower rate. There is no separate California capital gains rate. Gain above your exclusion is taxed as ordinary income at the same rates as your wages. Long tenured owners often only find this out at the closing table.

So a taxable gain gets hit twice, at two different speeds. Federally it goes in at long term capital gain rates if you owned the home more than a year. At the state level it stacks on top of your other income and gets taxed like a paycheck.

Basis is the whole game, and receipts are how you prove it

Gain is not your sale price minus your purchase price. Gain is your amount realized minus your adjusted basis. Those two words are where the money is.

Your adjusted basis starts with what you paid, including settlement costs you took on at purchase. Then you add every capital improvement you made. Publication 523 draws the line this way: an improvement adds to the value of your home, prolongs its useful life, or adapts it to new uses. A room addition. A new roof. Rewiring. A rebuilt kitchen. A pool. New central air.

Repairs and maintenance do not add to basis. Painting a room, fixing a gutter, replacing a broken pane. Those keep the house in working order, and they are not improvements.

Your amount realized is the sale price minus your selling expenses, which includes commissions, title fees and other closing costs you pay. Higher selling costs mean lower gain.

The reason receipts matter is simple. The IRS expects you to be able to substantiate your basis. Undocumented improvements are the most common reason a seller pays tax on money they already spent. If you added $180,000 of improvements over 25 years and can prove $40,000 of it, you are taxed as if you spent $40,000.

Start pulling permits, contractor invoices and closing statements now, before the house is under contract. Then see what the sale actually leaves you with. Our California capital gains estimator lets you put your basis and improvements in and see the shape of it in a couple of minutes.

If the house was ever a rental, depreciation comes back

Renting out the house, even for a couple of years, even a room, changes the math permanently.

When a property is used to produce rental income, you depreciate it. That depreciation lowered your taxable income back then, and it lowered your basis. Lower basis means bigger gain when you sell.

Two things happen at sale:

• Depreciation you took after May 6, 1997 cannot be excluded. Section 121 does not shelter it. That portion of gain is taxable even if the rest of your gain fits inside the exclusion.
• It is recaptured as unrecaptured Section 1250 gain. Federally that piece is taxed at a maximum rate of 25 percent, which is higher than the long term capital gain rates that apply to the rest.

Depreciation you were allowed counts even if you never claimed it. The reduction to basis is based on depreciation allowed or allowable. Skipping the deduction does not save you here.

California does not have a separate recapture rate. The recaptured amount is ordinary income at state rates like everything else.

If the house was ever rented, do not estimate this yourself. Bring the depreciation schedules to your CPA before you sign a listing agreement.

The money withheld at closing is not a tax

California withholds at closing on most real estate sales. The form is Franchise Tax Board Form 593, Real Estate Withholding Statement. Escrow handles it.

It is a prepayment of California income tax, not an additional tax. The Franchise Tax Board says it plainly in the Form 593 instructions: the amount of withholding does not satisfy your tax liability.

Two ways to calculate it:

• Sales price method. 3 1/3 percent of the sales price. This is the default.
• Alternative withholding calculation. Your applicable tax rate applied to your estimated gain. For an individual the Form 593 rate table uses 12.3 percent. On a long held home with a big gain this can be larger. On a modest gain it is usually much smaller than 3 1/3 percent of the whole price.

You elect the alternative on Form 593 during escrow. The instructions are blunt about timing: after the transaction closes, amounts withheld can be recovered only by claiming the withholding as a credit on that year's tax return. So if too much comes out, you get it back, but not until you file.

Some sales are exempt. Withholding is not required when the sales price is $100,000 or less, or when you certify on Form 593 that the property was your principal residence under Section 121. That principal residence certification generally requires the same test as the exclusion, owned and lived in as your main home at least 2 years of the 5 years ending on the sale date. You have to submit Form 593 before the transaction closes for the exemption to work.

Where the exclusion falls short in the Conejo Valley

Here is the honest limitation on this whole page. The $250,000 and $500,000 amounts were set in 1997 and have not changed since 1997. They are the same dollars today that they were then. Local prices are not.

In the 12 months to August 18, 2026, Calabasas closed 274 sales at a median price of $1,762,500. Westlake Village closed 391 at a median of $1,425,000. Agoura Hills closed 216 at $1,300,000. Hidden Hills closed 15 at a median of $6,000,000.

Run that against an owner who bought in the 1990s. A couple who paid $400,000 and sells at the Calabasas median has roughly $1.36 million of raw gain before basis adjustments. The $500,000 exclusion covers part of it. The rest is taxable, federally and by California, and California takes its share at ordinary income rates.

That is the reality for a lot of long tenured owners here. The exclusion helps. It does not make the tax disappear. Which is exactly why documented improvements and correct sequencing are worth real money on a house at these prices, and why the conversation with your CPA should happen before you list, not after you are in escrow.

Get the sale price side of that conversation nailed down first. Our home value report gives you a projected list price for your specific address plus what you net after every fee, so your CPA has something real to work from.

Do these four things before you list

• Pull your original closing statement. You need your purchase price and the settlement costs you took on at purchase.
• Collect every improvement receipt, permit and contractor invoice. This is the highest paid hour of paperwork in the entire sale.
• If the property was ever rented, find the depreciation schedules from those tax years.
• Send all of it to your CPA with your expected sale price. Ask what your taxable gain looks like and whether to elect the alternative withholding calculation on Form 593.

Then get the price side settled. Request your home value report. We send your projected value, all three ways to sell, and what you keep after every fee. No cost, no obligation, and no one calls you unless you ask us to.