When you sell a house in California, two governments may want a piece: the IRS and the Franchise Tax Board. Whether you actually owe anything depends on how much you gained, whether it was your home or a rental, and how long you owned it.
For a lot of sellers, the answer is that they owe nothing or very little, thanks to a generous exclusion. For others, especially long-time owners and landlords, the bill can be large. Here's how to tell which group you're in.
Capital gains: the core rule
You're taxed on your gain, not your sale price. Gain is roughly:
Sale price − selling costs − your cost basis = capital gain
Your cost basis is what you originally paid, plus the cost of capital improvements (a new roof, an addition, a remodel) over the years. Keeping records of those improvements directly lowers your taxable gain.
If you owned the home more than a year, the federal gain is taxed at long-term capital gains rates: 0%, 15%, or 20% depending on income. California has no separate capital gains rate. It taxes the gain as ordinary income, up to 13.3% at the top.
The exclusion that saves most homeowners
If the house was your primary residence, Section 121 lets you exclude a large chunk of the gain:
- $250,000 if you're single.
- $500,000 if you're married filing jointly.
To qualify, you generally must have owned and lived in the home as your main residence for at least 2 of the last 5 years. So a married couple with a $480,000 gain on their primary home usually owes no capital gains tax at all.
The catch in California: in expensive Bay Area markets, decades of appreciation can blow past even the $500,000 exclusion. A couple who bought in Oakland in 1995 for $200,000 and sells for $1.3 million has an $1.1 million gain, and only $500,000 of it is excluded. The remaining $600,000 is taxable.
Inherited property gets a step-up
If you inherited the house, the rules are very different and usually better. Your cost basis "steps up" to the property's fair market value on the date the previous owner died. Sell soon after, and there may be little or no gain to tax. We cover this in detail in our guide on capital gains on inherited property in California.
Rental property: depreciation recapture
If the house was a rental, there's an extra layer. The depreciation you claimed (or could have claimed) over the years gets "recaptured" and taxed, federally at up to 25%. This catches a lot of landlords off guard because it applies even if you never actually deducted the depreciation.
Landlords trying to avoid this bill often look at a 1031 exchange to defer it, which works only if you reinvest in another investment property within strict deadlines.
California's 3.33% withholding at closing
California requires withholding of 3.33% of the total sale price (not the gain) at closing, sent to the Franchise Tax Board as a prepayment. There are exemptions, the most common being a primary residence that qualifies for the Section 121 exclusion. You claim the withholding back, or settle up, when you file your state return.
Don't confuse this with your actual tax owed. It's a prepayment, and you may get most of it back.
The 1099-S and federal withholding
At closing, escrow typically files a 1099-S reporting the sale to the IRS, so the sale is on the record whether or not you owe. If the seller is a foreign person, FIRPTA requires the buyer to withhold a percentage of the sale price for the IRS, a separate rule from California's.
Quick reference
| Situation | Likely tax outcome |
|---|---|
| Primary home, gain under $250k/$500k | Usually no capital gains tax |
| Primary home, gain over the exclusion | Tax on the excess gain |
| Inherited home sold soon after death | Little or no gain (stepped-up basis) |
| Rental property | Capital gains plus depreciation recapture |
| Any sale | 3.33% CA withholding at closing (unless exempt) |
Does selling for cash change the tax?
No. The tax you owe is based on your gain, not on who buys the house or how fast you close. A cash sale to us has the same capital-gains treatment as a traditional sale.
What a cash sale does change is the other side of the ledger. We don't charge a commission, because we're the buyer, not an agent. We pay closing costs that we'd normally split, and you sell as-is with no repair spending. Those savings don't reduce your tax, but they increase what you actually keep. See our full breakdown of closing costs in California.
Always confirm with a tax professional
Every situation is different, and the numbers here are general. Before you sell, talk to a CPA or tax attorney about your specific basis, exclusion eligibility, and any recapture. This article is information, not tax advice.
If you want a cash offer to run your own numbers against, call or text 415-800-1415 or use our get an offer page. You'll have a real figure within 24 hours.
About Roe
Roe is part of the Maple Home Buyers team. Roe leads the Maple Home Buyers team in the Bay Area. Family-owned, BBB accredited, 2,000+ homes purchased since 2009.
Learn more about our team →Thinking about selling? Get a free, no-obligation offer.
A real local person picks up. No high-pressure pitch, no credit check, no obligation.
