California capital gains tax works differently from the way most sellers assume because the state doesn’t give you a lower tax rate for holding an asset longer.
The California Franchise Tax Board (FTB) treats capital gains as ordinary income. That means a rental property you’ve owned for 12 years can qualify for the federal long-term capital gains rate of 15% or 20%. California still taxes the profit at your regular state income tax rate, which can reach 13.3%.
Understanding both sets of rules can help you estimate your tax bill before selling. Your holding period, the type of property you sell, and your adjusted cost basis can all affect how much you owe.
Check how California capital gains tax works in 2026, including the rules for selling a home, rental property, and inherited real estate.
How capital gains tax works in California
California doesn’t have a separate capital gains tax rate. Instead, your profit from selling an asset is added to your other taxable income and taxed at your regular state income tax rate.
The holding period doesn’t change how California taxes the gain. A stock held for three weeks and a duplex held for 20 years receive the same treatment under the state’s capital gains rules.
The federal government handles long-term capital gains differently. So, California’s long-term capital gains tax is not its own tax. It is your state income tax applied to a gain.
Two numbers determine what you owe:
- Your taxable gain: Start with the sale price, subtract selling costs, and then subtract your adjusted cost basis.
- Your total taxable income: Your gain is added to your other taxable income, including salary and rental income. This can move some of your income into a higher tax bracket.
This is why a large property sale can result in a bigger tax bill than expected. A $400,000 gain doesn’t automatically get taxed at the same rate as your income from the previous year. It can push your taxable income into higher brackets.
California capital gains tax rates and brackets
The California capital gains tax rate is your income tax rate. California has nine main income tax brackets, ranging from 1% to 12.3%.
The schedule below is the current one published by the Franchise Tax Board, which re-indexes it each year and releases new figures with the tax forms.
California income tax rate schedule: single or married filing separately (current published FTB schedule)
| Taxable income | Rate |
|---|---|
| $0 – $11,079 | 1% |
| $11,079 – $26,264 | 2% |
| $26,264 – $41,452 | 4% |
| $41,452 – $57,542 | 6% |
| $57,542 – $72,724 | 8% |
| $72,724 – $371,479 | 9.3% |
| $371,479 – $445,771 | 10.3% |
| $445,771 – $742,953 | 11.3% |
| Over $742,953 | 12.3% |
California income tax rate schedule: married filing jointly (current published FTB schedule)
| Taxable income | Rate |
|---|---|
| $0 – $22,158 | 1% |
| $22,158 – $52,528 | 2% |
| $52,528 – $82,904 | 4% |
| $82,904 – $115,084 | 6% |
| $115,084 – $145,448 | 8% |
| $145,448 – $742,958 | 9.3% |
| $742,958 – $891,542 | 10.3% |
| $891,542 – $1,485,906 | 11.3% |
| Over $1,485,906 | 12.3% |
The 9.3% bracket covers a broad income range, around $73,000 to $371,000 of taxable income for a single filer. That means many property sellers may fall into this bracket, depending on their other income.
The 1% tax that’s still named incorrectly
California adds an additional 1% tax when taxable income exceeds $1 million. This is what brings the state’s often-quoted top income tax rate to 13.3%.
There’s also a naming change worth knowing about. For tax years starting on or after January 1, 2025, California renamed the ‘Mental Health Services Tax’ the ‘Behavioral Health Services Tax’. The rate and income threshold remain the same.
The additional tax applies to taxable income above $1 million and is reported on line 62 of Form 540.
The federal capital gains tax on top
Federal law gives you a tax break for holding an asset for more than a year. These are the 2026 thresholds.
Federal long-term capital gains tax rates: 2026
| Filing status | 0% up to | 15% up to | 20% above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
| Head of household | $66,200 | $579,600 | $579,600 |
If you sell within a year, then there is no discount at all. Short-term gains are taxed as ordinary income, up to 37% federally.
Higher-income sellers may also face two additional federal taxes:
- Net Investment Income Tax (NIIT): This adds 3.8% when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.
- Depreciation recapture: When you sell rental property, some of the gain related to depreciation may be taxed at a federal rate of up to 25%.
Do you have to pay taxes on selling a house in California?
Not always. If you’re selling your primary residence, you may qualify for a federal capital gains exclusion under Internal Revenue Code Section 121. California generally follows this.
The $250,000 and $500,000 exclusion
If the home was your main residence, you can exclude up to $250,000 of gain on your own, or $500,000 filing jointly.
The IRS generally requires you to meet two tests:
- Ownership test: You owned the home for at least 24 months during the five years before the sale.
- Use test: You lived in the home as your main residence for at least 24 months during that same five-year period.
The 24 months don’t have to be consecutive, and the ownership and use periods don’t necessarily have to overlap.
California generally follows the same federal exclusion limits, but you should check the specific eligibility requirements before relying on the exclusion:
- You can only have one home at a time.
- For a married couple, either spouse can meet the ownership test, but both must meet the use test.
- Neither of you can have excluded a gain on another home in the past two years.
- A joint return is required for the year of the sale.
Suppose a married couple bought a home in 2009 for $420,000 and later sold it for $890,000. Their gain would be $470,000. If they qualify for the full $500,000 exclusion, nothing is taxable.
Tax consequences of selling a house in California, step by step
You can estimate your taxable gain by these five steps:
-
Start with the sale price.
-
Subtract selling costs, such as commissions, escrow fees, title fees, and eligible transfer costs.
-
Subtract your adjusted cost basis, which generally starts with the purchase price and includes eligible capital improvements.
-
Subtract the exclusion, if the home qualifies.
-
Any amount left is taxable on both returns, once at the federal long-term rate and once at your California income rate.
Capital gains tax on real estate in California for rental properties
The home-sale exclusion generally doesn’t apply to a property held purely as an investment.
Capital gains tax on real estate in California can also involve depreciation recapture and withholding at closing. Both can affect how much money you receive when the property sells.
Depreciation recapture
If you rented out a property, you may have claimed depreciation deductions over the years. These deductions reduce your adjusted cost basis.
When you sell, that depreciation comes back as income at up to 25% federally. California taxes it as ordinary income with everything else.
A property owned for 15 years can carry over $100,000 of depreciation to recapture, taxed at up to 25% federally, even before you count any increase in its value.
California rental property owners who have owned their properties since the early 2010s are often the most affected by this, which is why keeping rental property records organized, including a running depreciation schedule matters more than reconstructing one at escrow.
If you converted a home to a rental
Selling a property that was once your primary residence and later became a rental can be more complicated. You may still qualify for a partial home-sale exclusion, depending on the timing and circumstances.
However, depreciation claimed during rental use generally cannot be excluded from the gain. The gain is divided between the residence and rental portions. Accurate rental bookkeeping helps keep the supporting records organized.
The 3 1/3% taken at escrow
California withholds tax at closing. Under the standard method, it is 3 1/3%, or .0333, of the total sales price, reported on Form 593.
The important detail is that this calculation uses the sale price, not your taxable gain.
For example, a $900,000 sale could result in roughly $30,000 being withheld, even if your actual tax liability is much lower.
Withholding is not necessarily your final tax bill. Depending on your situation, you may be able to elect an alternative calculation based on estimated gain using Form 593.
Certain exemptions may also apply, including qualifying sales of $100,000 or less, foreclosure-related transactions, and some sales by banks acting as trustees. The election must reach escrow before closing, so raise it early.
Your basis file decides the bill
The tax rates are set by law, but your adjusted cost basis is one factor that can affect the size of your taxable gain. The records you keep help establish that basis.
Eligible capital improvements can increase your basis, which may reduce your taxable gain when you sell. Ordinary repairs generally don’t count as capital improvements.
You are responsible for providing proof of the amounts reported on your tax return. If you claim the cost of a new roof but haven’t kept organized receipts, you may have trouble proving that expense if the IRS questions it.
Keep these six records together. Call it your basis file:
- The closing statement from when you bought the property.
- Receipts and invoices for eligible capital improvements, such as additions, a new roof, a kitchen renovation, or HVAC upgrades.
- The depreciation schedule, if the property was rented.
- A date-of-death appraisal, if you inherited the property.
- Form 593 from escrow, showing any California withholding.
- Form 3840, if a 1031 exchange is anywhere in its history.
Most sellers we help are missing at least two. Rebuilding years of documentation at that stage can take time and may cost more than keeping it organized from the start.
If your records are incomplete, catch-up bookkeeping before you list is cheaper than the tax you overpay without it.
Predawn Accounting helps you get your business in shape for taxes, loans, and
growth. Stop worrying about accounting and speak with a real, human expert.
Capital gains on an inherited house and step up in basis in California
Inherited property gets the most favorable tax treatment in the code, and it usually means a small tax bill rather than a large one.
Your basis resets to the property’s fair market value on the date of death. As a result, appreciation that occurred during the previous owner’s lifetime may not be included in your taxable gain when you sell, and California follows the federal rule.
Suppose your parents bought a home for $180,000 in 1991. At the time of their death, the property was worth $1.1 million. Your starting basis would generally be $1.1 million.
If you sold the property a few months later for $1.13 million, your gain would be about $30,000, not $950,000.
Two practical points on the sale of inherited property tax implications:
- Get a date-of-death appraisal: It helps establish the property’s fair market value and supports your inherited basis. Without reliable evidence, determining the correct basis can be difficult.
- Account for appreciation after the inheritance: If you inherit a home valued at $1.1 million and later sell it for $1.25 million, the gain would be $150,000 before eligible selling costs and other adjustments.
There is one more issue. California escrow withholding is based on the sale price under the standard method, not the taxable gain. A $1.13 million sale could result in around $37,600 being withheld, even if your actual tax on the gain is much lower. File the alternative calculation on Form 593 before closing, or wait for the refund.
A gift works differently from an inheritance. Property given during the owner’s lifetime carries their original basis to you, which is why receiving a house early often costs far more in tax than inheriting it later.
The community property advantage for married couples
California is a community property state, and that matters at the first death. Property held as community property receives a full step-up in basis when one spouse passes away, not just half of it.
Suppose a couple bought a home for $200,000 and its value later increased to $1.2 million. If the property qualifies for the full step-up in basis, the surviving spouse’s new basis could be $1.2 million instead of $700,000. That can significantly reduce capital gains tax if the home is sold later.
The way the property is titled matters, so check the ownership documents when both spouses are still living. This applies to spouses, not registered domestic partners, and at least half of the property’s value must be included in the deceased spouse’s estate.
Proposition 19 is not a capital gains rule
Proposition 19 changes property tax assessment. It has nothing to do with capital gains tax. The Board of Equalization describes it as the Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act.
It limited the parent-to-child exclusion to a principal home and family farms. It also allows homeowners 55 or older, severely disabled, or disaster victims to move their assessed value to a replacement home anywhere in California, up to three times.
The step-up in basis is a separate federal tax rule, and Proposition 19 does not change it. Both involve inherited homes, but they deal with different taxes.
Where the tax legally gets deferred or reduced
There are several ways to manage capital gains tax under the tax code. Each has its own requirements, so discuss your options with a qualified tax professional before making a decision.
A 1031 exchange: This applies to qualifying investment real estate, not a primary residence. California generally follows the federal rules for real property exchanges, but there’s an important detail to remember.
If you exchange California property for property outside the state, you must file Form 3840 for the exchange year and each subsequent year until the deferred gain is recognized.
The FTB keeps the gain California-sourced throughout, and not filing can lead to estimated assessments and penalties.
An installment sale: Receiving payments over several years may spread the taxable gain across multiple tax years, and this could help you avoid moving into higher tax brackets all at once.
Timing: A sale in a low-income year faces lower brackets than one in a high-income year.
Harvesting capital losses: Capital losses can offset capital gains. If your net capital loss exceeds your gains, you can generally deduct up to $3,000 against ordinary income each year, or $1,500 if you’re married filing separately. Any remaining loss can be carried forward to future years.
Documenting improvements: It is one of the simplest ways to reduce your taxable gain rather than deferring the tax.
Before you sign the listing agreement
It’s much easier to organize your cost-basis records before selling than during escrow. Once a sale is in progress, the closing timeline can leave little time to find an old roofing invoice or reconstruct years of property expenses.
We help property owners keep those records organized. Our real estate bookkeeping services maintain cost-basis records, improvement logs, and depreciation schedules your CPA may need when preparing your tax return. Our bookkeeping services can also help keep the rest of your financial records up to date.
Thinking about selling this year? Book a free consultation, and we will review your property records, tell you which parts of the basis file are missing, and what it takes to close the gaps before you list.
This is general information, not personalized tax advice. Consult a licensed CPA or tax professional for your specific situation.
FAQs
Does California have a lower rate for long-term capital gains?
No, the California Franchise Tax Board confirms that the state taxes capital gains as ordinary income. A property held for 20 years receives the same state tax treatment as one held for two weeks. The long-term discount exists only federally.
Does California tax the gain on my home sale?
Usually not, if it was your main residence. California follows the federal exclusion, so up to $250,000 of gain is excluded on your own and $500,000 on a joint return, provided you owned and lived in the home for two of the previous five years. Any gain above that is taxable.
Do I pay California tax if I sell after moving out of state?
For California real estate, yes. The gain from property located in California generally remains California-source income, even if you've moved elsewhere before selling. For example, selling a rental property in Fresno after moving to Nevada may still create a California tax obligation. A move shortly before the sale may also lead the FTB to review your residency status and connections to California.
Do I pay capital gains tax when I inherit a house?
You generally don't pay capital gains tax simply because you inherit a house. Your basis resets to the home’s value on the date of death, so selling soon after produces a small gain or none. Tax applies to appreciation after that date, which is why the date-of-death appraisal matters.
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