How to Calculate Capital Gains Tax on the Sale of Real Property in California

Written by cinda roth
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How to Calculate Capital Gains Tax on the Sale of Real Property in California
Capital gains on property held 12 months or less is considered earned income and may impact your tax bracket (tax forms image by Chad McDermott from Fotolia.com)

Selling a property in California typically means paying capital gains tax on your profit. The tax varies based upon your income tax bracket. Under the Taxpayer Relief Act of 1997, IRS Restructuring and Reform Act of 1998, and Jobs and Growth Tax Relief Reconciliation Act of 2003 several exclusions of up to £325,000 from capital gains taxes were provided for property used as a primary residence, under specific circumstances. Calculating the capital gains tax enables one to prepare for the tax season.

Skill level:
Moderate

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Instructions

  1. 1

    Subtract the original purchase price of the property and the selling expenses (such as Realtor commission) from the sales price of the property to determine the reportable capital gains.

  2. 2

    Subtract £162,500 from the reportable capital gains if at least one of the owners has owned and used the property for at least two of the five years prior to the sale of the property and has not claimed a capital gains tax exclusion in the last two years.

  3. 3

    Subtract an additional £162,500 from the reportable capital gains if the owners are married, filing jointly, neither spouse has claimed a capital gains tax exclusion in the last two years, and both spouses owned and used the property for at least two of the five years prior to the sale of the property.

  4. 4

    Subtract an additional £162,500 multiplied by the number of years lived in the house and divided by two from the reportable capital. This deduction is available if at least one of the owners has owned and used the property for less than two of the five years prior to the sale of the property, has not claimed a capital gains tax exclusion in the last two years, and sold the property due to a change in location of employment of 50 miles or more, health change where moving enabled the owner to better obtain medical or personal care, natural or man made disaster that caused significant damage to the property, death of a property owner, termination of employment that makes the owner eligible for unemployment compensation, change in employment that results in the owner being unable to pay housing and basic living expenses, divorce filed by or against the owner, legal separation of the owner, multiple births from the same pregnancy where the owner is the parents, or event determined by the California Commissioner to be unforeseen that forces the owner to sell the property.

  5. 5

    Subtract an additional £162,500 multiplied by the number of years lived in the house and divided by two from the reportable capital if the owners are married filing jointly, and both spouses have owned and used the property for less than two of the five years prior to the sale of the property, have not claimed a capital gains tax exclusion in the last two years, and sold the property due to a change in location of employment of 50 miles or more, health change where moving enables an owner to better obtain medical or personal care, natural or man made disaster that caused significant damage to the property, death of a property owner, termination of employment that makes the owner eligible for unemployment compensation, change in employment that results in the owner being unable to pay housing and basic living expenses, divorce, legal separation, multiple births from the same pregnancy to one of the owners, or event determined by the California Commissioner to be unforeseen that forces the property to be sold.

  6. 6

    Multiply the reportable capital gain minus all subtractions for use as a primary residence by the long term capital gains rate, if the property was held for more than 12 months, and the short term capital gains rate, if the property was held for less than 12 months. In 2010 the long term capital gains tax rate ranged from 5% to 15% depending on the tax payer's income bracket. The short term capital gains tax rate in 2010 was the same as the tax payer's earned income tax rate.

Tips and warnings

  • Check with the IRS on the current long term capital gains tax rate as it can change annually.
  • Consider tax implications when selling property held less than 12 month, in some cases it may be beneficial to delay selling the property until you have owned it for 12 months to avoid paying higher short term tax rates.
  • Always contact an appropriate legal or tax profession with any questions as tax code typically changes annually.

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