Many of my clients come to me with a very Californian problem: they bought their home many years ago for a fraction of what that home is worth today. For example, their mid-century house near downtown cost them $125,000 in 1973 and could be sold for $3.2 million next weekend. While that’s an excellent problem to have in some ways, what it means for a person who needs to sell that home is that they are going to have to pay a lot of capital gains on that sale.
Capital gains taxes are levied upon the difference between what someone buys an asset for (called ‘basis’) and what they sell that asset for–the lower the basis, the higher the gain, and the higher the tax. In 2016, the maximum for long-term federal capital gains taxes (for assets held longer than one year) is 23.8% for high income families. In California, you need to add another 10%-13.3% for capital gains , so roughly a 33% total tax is what you’d expect to pay for capital gains at both the state and federal level.
Each person is entitled to a $250,000 exclusion on capital gains taxes for the sale of their primary residence, so if a married couple sells, they’ll have $500,000 excluded from tax. In many parts of the country, that means people can indeed sell their residence and pay no capital gains taxes. But not around here.