Capital Gains Tax When You Sell Your Home in California: The $250,000/$500,000 Exclusion, Rentals and State Tax

This guide is for long-time owners in Redding, Anderson, Red Bluff, Corning, and nearby towns, and for downsizers, people moving away, and small landlords selling a rental. It covers what's taxed, what's excluded, and what California does differently. Inherited the house? Read about taxes when you sell an inherited house instead. I don't explain the step-up in basis here.

I'm a home buyer, not a tax advisor. This is general information, not tax or legal advice. Talk to a CPA, enrolled agent or other tax professional about your situation.

Last reviewed October 8, 2026 by Derek Torculas. Tax points were checked against IRS, Franchise Tax Board, and Board of Equalization sources on that date (listed at the bottom of the page).

The formula

How the Gain on a Home Sale Is Figured

Gain equals selling price minus selling expenses minus adjusted basis. Selling price minus selling expenses is the amount realized (IRS Publication 523, "Figuring Gain or Loss").

Adjusted basis starts with what you paid. Improvements that add value, such as a new roof or a remodel, raise it. Depreciation lowers it (IRS Topic 703). Keep the receipts. Simple repairs are not the same as improvements. Your CPA can tell the difference.

A loss on selling your main home can't be deducted. You don't owe tax on the money you get from the sale when there is no gain (Publication 523).

How long you owned it matters. Gain on property held more than one year is long-term, at federal rates of 0%, 15%, or 20%, depending on income. Short-term gain is taxed as ordinary income (IRS Topic 409). The income cutoffs change every year, so they aren't listed here. Higher-income sellers may also owe the net investment income tax. Topic 409 points to Topic 559.

Section 121

The $250,000/$500,000 Home Sale Exclusion (Section 121)

You can exclude up to $250,000 of gain, or up to $500,000 on a joint return, when you sell your main home. That is the home sale exclusion, also called the Section 121 exclusion (IRS Topic 701).

The 2-out-of-5-year rule

• Ownership test. You owned the home for at least 24 months of the 5 years before the sale.
• Use test. You lived in it as your main home for at least 24 months of those 5 years.

The two periods don't have to be the same 2 years, but both must fall within the 5 years ending on the sale date (Topic 701).

For the $500,000 limit on a joint return, either spouse can meet the ownership test, but both must meet the use test (Topic 701). The Franchise Tax Board applies the same $500,000 idea to married couples and registered domestic partners who file a joint return (FTB, "Income from the sale of your home").

You generally can't use the exclusion if you excluded gain on another home in the 2 years before this sale (Topic 701; Publication 523, "Look-Back"). And if you got the home through a 1031 exchange in the past 5 years, the exclusion doesn't apply (Publication 523, Eligibility Step 1).

Surviving spouses have extra rules. If you haven't remarried, you may be able to count your late spouse's ownership and use. You may also be able to use the $500,000 limit if you sell within 2 years of your spouse's death and meet the other conditions (Publication 523, "Surviving spouses"). Ask your CPA. If the house was inherited and you didn't live in it, see taxes when you sell an inherited house.

Moved out already? The 5-year clock is running

The 2-out-of-5-year tests look back from the date of sale. If you lived there 2 years and then moved out, the window closes as time passes (Topic 701).

If you rented it after moving, the exclusion can still apply. Gain equal to depreciation after May 6, 1997 can't be excluded (Publication 523, "Recapturing Depreciation"). See the rentals section.

If you are physically or mentally unable to care for yourself and you moved to a licensed care facility, Publication 523 has a special residence rule. Ask your CPA.

If the sale is because you're leaving town, see selling because you're moving.

Didn't live there 2 years? You may get a partial exclusion

You may qualify for a partial exclusion if the main reason you sold was one of these (Publication 523, "Does Your Home Qualify for a Partial Exclusion of Gain?"):

• A work-related move, for example a new job at least 50 miles farther from the home than your old job.
• A health-related move.
• An unforeseeable event, such as a death, a divorce, or a job change.

Publication 523 has the worksheet. Your CPA can run it. This page doesn't give the formula. A job move is covered under selling because you're moving. A split is covered under selling during a divorce.

What actually changes the number

Can You Avoid Capital Gains Tax When You Sell Your Home?

For most owners who lived in the home, the exclusion is the big legal way the gain goes untaxed. Here's what actually changes the number. Selling to a cash buyer does not change the tax.

• Qualify for the full exclusion. Know your 2-out-of-5-year dates before you set a closing date (Topic 701).
• Count your improvements. They raise your basis and lower the gain. Dig out the receipts (Topic 703).
• Count your selling expenses. They lower the amount realized (Publication 523).
• Check for a partial exclusion if a job, health, or an unforeseeable event forced the sale (Publication 523).
• Rentals: a 1031 exchange can defer the gain. It doesn't erase it, and it doesn't work for your main home.

Your CPA can tell you which of these apply before you sell.

Rentals and second homes

Selling a Rental or Second Home

The home sale exclusion is for your main home. A rental or second home you didn't live in for 2 of the last 5 years doesn't qualify (Topic 701).

Time it wasn't your main home counts against you. Gain from periods after 2008 when the home wasn't your main home, called nonqualified use, generally can't be excluded. One exception: time after you moved out, within the 5 years before the sale, doesn't count against you (Publication 523, "Nonqualified use"). Ask your CPA.

Depreciation recapture

Depreciation you took, or could have taken, lowers your basis and raises your gain (Topic 703). On a home you also rented or used for business, gain equal to depreciation after May 6, 1997 can't be excluded (Publication 523). The IRS calls that part of a long-term gain unrecaptured section 1250 gain and taxes it at a maximum 25% rate (Publication 544; Topic 409).

1031 exchanges (rentals and investment property only)

A like-kind exchange lets you defer gain when you exchange real property used for business or held as an investment for other like-kind real property. If you also get cash or other property, gain is taxed up to that amount (IRS, "Like-kind exchanges – real estate tax tips"). Your main home doesn't qualify (Publication 523).

You must identify the replacement property within 45 days after you transfer the old one, and receive it within 180 days or by your tax return due date, including extensions, whichever is earlier (IRS Instructions for Form 8824).

California adds a step. If you exchange California property for property outside California, California requires an annual information return, FTB 3840 (FTB 2026 Instructions for Form 593).

A 1031 exchange has strict rules and timing. Talk to your CPA before you accept any offer, including ours. If the rental has tenants, see selling a rental property and selling a house with tenants in Shasta County.

State tax

How California Taxes the Gain

California follows the federal home sale exclusion. The Franchise Tax Board says: "We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home." That's on the FTB page "Income from the sale of your home" (updated January 7, 2026).

California has no special capital gains rate. The FTB says: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." That's on the FTB capital gains and losses page. Report taxable gain on federal Schedule D. File California Schedule D (540) only if the federal and state amounts differ.

Moved out of California? Ask your CPA how California taxes the sale.

Escrow withholding: Form 593

When California real estate is sold, withholding is generally required unless an exemption applies (FTB 2026 Instructions for Form 593).

A full exemption applies when the property qualifies as your principal residence under Section 121. There are also full exemptions for a sale price of $100,000 or less, or a loss or zero gain (Form 593, Part III; FTB real estate withholding).

Without an exemption, the default is 3 1/3% of the sales price. An alternative calculation based on the gain is also allowed (Form 593, line 30). Submit Form 593 to your escrow officer before closing to claim an exemption (FTB real estate withholding page).

Withholding is a prepayment, not an extra tax. It's credited when you file. Ask your CPA.

Property tax, not income tax

Downsizing at 55+? Prop 19 Can Move Your Property Tax Base (Separate from Capital Gains)

There's no special capital gains break for being over 55. The home sale exclusion works the same at any age. The age-55 rule people remember is Proposition 19, and Prop 19 is about property tax.

Owners who are 55 or older, or severely disabled, may transfer their base-year value when they sell a main home and buy or build a replacement main home. The Board of Equalization Proposition 19 page and its FAQs say:

• You buy or build the replacement main home within 2 years of selling.
• The new home can be anywhere in California.
• You can do this up to three times.

The replacement counts as equal or lesser value if it is 100% of the old home's value when you buy before the sale, 105% when you buy in the first year after the sale, or 110% in the second year. In that case the old base-year value carries over with no adjustment. If the new home costs more, the amount above that test is added to the taxable value.

File form BOE-19-B with the assessor of the county where the replacement home is. File within 3 years of buying the new home. You must have completed both transactions and moved in. The claim is not done through escrow.

If you're selling so you can move to a smaller place, see selling to downsize.

The paperwork

Reporting the Sale: Form 1099-S

If you get a Form 1099-S, you must report the sale, even if the whole gain is excluded. You also must report it if you can't exclude all of the gain. Use Schedule D and Form 8949 (Topic 701).

The Franchise Tax Board says you don't have to report the sale on your California return if all of these are true: the gain was less than $250,000; you haven't used the exclusion in the last 2 years; and you owned and lived in the home at least 2 years (FTB, "Income from the sale of your home").

Before you pick a date

What to Bring Your CPA Before You Sell

• Your purchase closing statement (what you paid).
• Receipts for improvements.
• The dates you owned the home and lived in it, including any time it was rented.
• Any depreciation you took, from past tax returns (rentals and home offices).
• An estimate of the sale price and selling costs.
• After closing: the escrow closing statement, Form 1099-S, and Form 593.

Questions worth asking:

• "Do I qualify for the full exclusion, or a partial one?"
• "How much depreciation will be taxed?"
• "Does a 1031 exchange make sense for this rental?"
• "Should I make an estimated tax payment?"

If you decide to sell

Where a Quick, Simple Cash Sale Fits

Taxes follow the same rules whether you sell to a cash buyer or list with an agent: sale price minus selling expenses minus your basis. What a cash sale can change is time, repairs, and showings.

If the 2-year mark is close, ask your CPA before you pick a closing date. You help choose a closing date that fits your move; staying after closing is handled case by case.

If you decide to sell, we buy houses as-is in Shasta and Tehama County. We can close in as little as 7 days once you accept and title is clear. Unpermitted additions are reviewed case by case. We pay both the buyer's and the seller's closing costs.

Houses we buy:

• Single-family homes.
• Mobile and manufactured homes on their own land (not in parks).
• Rural homes on acreage and small ranches.
• Duplexes and small rentals, including with tenants in place.

We don't buy vacant land.

If the house is in great shape and you're not in a hurry, listing with a local agent may net more. I'll tell you if that's the case. Read cash offer vs. listing, how our cash offers work, how to spot a fake house buyer, and about Derek. Downsizers can start with selling to downsize.

Local cash buyer for 10+ years. 100+ NorCal homes purchased. BBB A+ rated. Read our Google reviews.

Where we buy

We Buy Houses Across Shasta and Tehama County

Also: Chico and Butte County.

Sources We Checked (October 8, 2026)

• IRS Topic 701, Sale of your home (reviewed September 24, 2026): the $250,000/$500,000 home sale exclusion, the 2-out-of-5-year tests, the joint-return rule, the once-every-2-years limit, and Form 1099-S reporting on Schedule D and Form 8949
• IRS Publication 523 (2025), Selling Your Home (reviewed April 30, 2026): gain formula, main-home losses, the look-back, a home acquired by 1031 exchange, partial exclusion, surviving spouses, nonqualified use, depreciation after May 6, 1997, and why a main home is not a 1031 exchange
• IRS Topic 409 (reviewed September 24, 2026): long-term and short-term gain, the 0%/15%/20% rates, unrecaptured section 1250 gain, and the net investment income tax
• IRS Topic 703, Basis of assets (reviewed September 24, 2026): improvements raise basis; depreciation lowers it
• IRS Publication 544 (2025): unrecaptured section 1250 gain
• IRS, "Like-kind exchanges – real estate tax tips" (reviewed May 1, 2026)
• IRS Instructions for Form 8824 (reviewed April 30, 2026): the 45-day and 180-day deadlines
• Franchise Tax Board, "Income from the sale of your home" (updated January 7, 2026): California follows the federal exclusion, and when a California return can skip the sale
• Franchise Tax Board, "Capital gains and losses": capital gains are taxed as ordinary income; Schedule D (540) when federal and state amounts differ
• FTB 2026 Instructions for Form 593: real estate withholding and FTB 3840 for an exchange of California property for property outside California
• FTB Form 593 (2026): the principal-residence exemption and the 3 1/3% withholding rate
• FTB, "Real estate withholding": give Form 593 to the escrow officer before closing
• Board of Equalization, Proposition 19 and its FAQs: the base-year value transfer for owners 55 or older or severely disabled

NorCal Home Offer is a home buyer, not a tax advisor or law firm. This page is general information, not tax or legal advice. Tax rules and dollar limits change. Talk to a CPA, enrolled agent or other tax professional about your situation. Last reviewed: October 8, 2026.