Guide to the California Capital Gains Tax: What You Need to Know

California is one of the most populous states in the U.S., attracting both individuals and businesses with its vibrant economy and abundant opportunities. However, when it comes to taxes, the Golden State is also known for its relatively high tax rates, including those on capital gains. Whether you are an investor, a homeowner, or a person living abroad, understanding California's capital gains tax is crucial to managing your finances efficiently.

In this comprehensive guide, we will explore the details of California’s capital gains tax, including its rates, exemptions, and how it can impact you. This blog is brought to you by Tax N More Services, a trusted accounting firm led by Robert Hall, providing expert guidance to individuals and businesses in California and beyond.

What Is Capital Gains Tax?

Capital gains tax is a tax on the profit from the sale of assets or investments, such as real estate, stocks, or bonds. In California, this tax is levied on the difference between the selling price of an asset and its purchase price.

Short-Term vs. Long-Term Capital Gains

Capital gains can be classified as short-term or long-term:

• Short-term capital gains: These are profits from assets held for one year or less before being sold. In California, short-term capital gains are taxed as ordinary income, meaning they are subject to the state's income tax rates.
  

• Long-term capital gains: These are profits from assets held for more than one year. While the federal government provides preferential rates for long-term capital gains, California does not differentiate between long-term and short-term capital gains. This means that all capital gains in California are taxed at ordinary income tax rates, regardless of the holding period.

California Capital Gains Tax Rates

Unlike the federal tax system, where long-term capital gains benefit from lower tax rates, California taxes all capital gains as ordinary income. As of 2025, California's income tax rates range from 1% to 13.3% depending on your income level. This makes the Golden State one of the highest-taxed states in the U.S.

Income Tax Brackets in California

California’s income tax system is progressive, with rates that increase as your income rises. The following are the key income tax brackets applicable to capital gains:

• 1% for income up to $10,099

• 2% for income between $10,100 and $23,942

• 4% for income between $23,943 and $37,788

• 6% for income between $37,789 and $52,455

• 8% for income between $52,456 and $66,295

• 9.3% for income between $66,296 and $338,639

• 10.3% for income between $338,640 and $406,365

• 11.3% for income between $406,366 and $677,275

• 12.3% for income between $677,276 and $1,000,000

• 13.3% for income over $1,000,000
  

As you can see, if you are selling a significant asset or making substantial gains, you could be subject to the highest tax rate in California.

The Impact of Capital Gains on Homeowners

For homeowners, capital gains tax can be particularly important when selling your primary residence. However, California offers some relief through the Primary Residence Exclusion for capital gains on the sale of your home.

Primary Residence Exclusion

Under federal law, homeowners may be eligible to exclude up to $250,000 ($500,000 for married couples) in capital gains from the sale of their primary residence, provided certain conditions are met. California follows the federal rules for this exclusion, so you can still benefit from this exclusion when selling your home. However, if the property was used for rental purposes or as a second home, different rules apply.

Deductions and Exemptions That Affect Your Capital Gains Tax

There are several deductions and exemptions that can potentially reduce the capital gains tax you owe in California.

Mortgage Interest Deduction Limit

One major consideration for homeowners is the mortgage interest deduction, which can affect your overall tax liability. While this is more closely related to your income tax rather than capital gains, understanding how it works can provide tax relief. The mortgage interest deduction allows homeowners to deduct the interest paid on their home loans, reducing their taxable income. However, this deduction is limited:

• For mortgages taken out after December 15, 2017, the mortgage interest deduction limit is $750,000 for individual filers or married couples filing jointly.
  

This deduction could lower your overall tax burden, freeing up more capital when you sell a property and reduce the amount subject to capital gains tax.

Rental Property and Taxation on Gains

For those who own rental properties, the taxation on capital gains from the sale can vary depending on the specific circumstances.

Rental Income Tax Rate

Income from rental properties is typically taxed as ordinary income in California, with rates ranging from 1% to 13.3% depending on your total taxable income. When it comes to selling a rental property, the capital gains from the sale are subject to the same progressive income tax rates.

Additionally, if you have claimed depreciation on the property, you may be subject to depreciation recapture. This means that part of your gain could be taxed at a higher rate, up to 25% on the depreciation portion of the gain, while the rest will be taxed at the ordinary income rate.

California Capital Gains Tax and Expats

For California residents who have moved abroad, understanding how California taxes capital gains is critical, especially when considering taxation for expats.

Taxation for Expats

California is one of the few states that continues to tax residents even if they live outside the state. As an expatriate, you may still be subject to California's capital gains tax on the sale of any assets located within the state, including real estate or stocks. This means that if you are a California resident living abroad, your capital gains could be taxed both in the U.S. and in the country where you reside. However, the Foreign Earned Income Exclusion may offer some relief for your earned income but does not apply to capital gains.

Keeping Up With Home Mortgage Interest Deduction News

The tax landscape is always changing, and staying informed about any changes to mortgage interest deductions or capital gains tax laws is essential for proper planning. Recently, there have been discussions around increasing the mortgage interest deduction limits and potential tax reforms that could affect homeowners and investors. Always check for the latest home mortgage interest deduction news to ensure you are taking advantage of all available tax-saving opportunities.

Conclusion

Understanding California’s capital gains tax is essential for effective financial planning. From the progressive tax rates to specific exemptions and deductions like the mortgage interest deduction limit, your overall tax liability can be influenced by many factors. Whether you are selling a home, rental property, or other investments, it’s critical to work with an experienced accounting firm to navigate the complexities of the state’s tax laws.

At Tax N More Services, led by Robert Hall, we specialize in helping individuals and businesses manage their taxes and maximize deductions to ensure they are not overpaying. If you are considering selling an asset, need guidance on rental income tax rates, or want to learn more about the impact of taxation for expats, our team is here to provide expert advice tailored to your situation.

Feel free to reach out to our accounting firm for personalized assistance in navigating California's capital gains tax.