When you sell a home in California, you are involved in a transaction that exchanges hundreds of thousands of dollars (sometimes millions). It is understandable, then, that a lot of paperwork is involved in this transaction. And, of course, taxes.
Taxes are not an area where you want to cut corners. Every T should be crossed and every I should be dotted. Your listing agent can help you through a lot of the process as they will be familiar with the local laws and procedures, and will likely even know the names of the best local offices to contact for handling everything that comes up while selling your home.
It’s always good to have an idea of what’s ahead of you, so let’s go over some things that will come up while you are selling a home in California.
The Seller Must Disclose Any Property Defects
California has laws that make it clear sellers are required to disclose any known defects on the property.
A seller who fails to disclose things may face severe penalties later if you’re found liable, so disclosure of anything that affects the property’s potential desirability is essential.
If you’re unsure about something, discuss it with your real estate agent. It’s likely they’ll tell you that if it’s iffy, you should disclose it to be safe.
In California, you will fill out a Transfer Disclosure Statement form to disclose any important information.
Everything Will Need to Be Handled in Writing
All real estate transactions require paperwork. To make sure things are handled correctly, the state of California has real estate laws that require everything be handled in writing.
This protects the seller from liability down the road and makes everything clear, so that you can handle the sale of your property and be done with it, as opposed to handling lawsuits about miscommunication down the road.
Find a real estate agent you trust, and they’ll be able to walk you through the procedures for selling your property. They can handle the paperwork, refer you to a real estate lawyer, and inform you of taxes and other concerns you’ll need to deal with along the way.
You May Need to Pay a Transfer Tax
When the property is officially transferred from a seller to a buyer in California, there will be a document recorded at the county recorder’s office.
This document details the changed ownership of the property. When this document is submitted, there will be a tax for the transfer of ownership known as the transfer tax.
This tax is typically paid to the county but also sometimes the city depending on where you are located. The cities of Los Angeles, Riverside, and San Francisco collect their own city transfer taxes.
You will need to check with your local real estate broker, or the city, to find out whether your city has a transfer tax and how much that tax is.
As is typical for closing costs, it is negotiable who will pay the transfer tax. That being said, there are industry standards in different regions. In northern California, it’s usually the buyer who pays for the transfer tax.
In southern California, it is usually the seller who pays. Your listing agent will be able to tell you what is standard in your area.
What About Property Taxes?
As a homeowner, you have been paying property taxes every year. Depending on the time of year, you may have paid property taxes in advance or have unpaid property taxes.
This can be negotiated with the buyer during selling. If you have unpaid property taxes, they can be pro-rated until the end of escrow. If you have paid in advance, you can negotiate with the buyer to credit you a pro-rated amount from the date of sale.
The Capital Gains Tax in California
A capital gains tax charges you on the difference between the amount you paid for an asset (this is known as the basis) and what you sell the asset for.
This tax can apply to several different kinds of investments, like stocks and bonds, or assets like boats, cars, and real estate. The amount you gained between the time you bought the property and the time you sold it is your capital gain.
The IRS charges you a tax on your capital gains and so does the state of California through the Franchise Tax Board, also known as the FTB.
Don’t fret too soon about this, as there are exemptions!
For single taxpayers, the exemption is $250,000. Married taxpayers have double the exemption amount for a $500,000 exemption.
This means that if you bought a home for $300,000 and sold it for $900,000, you would have a capital gain of $600,000. But if you’re married, your exemption is for $500,000 of that amount, so you would have a capital gain of $100,000 that you would need to pay taxes on.
There are a few things that can disqualify you from the capital gains exemption. For example, if the house wasn’t your primary residence. If this is an investment property or a second home, you won’t qualify for the exemption from the capital gains tax.
Other things that might disqualify you from the exemption:
- In the five years before you sold the property, you didn’t live in it for at least two of those years. If you are in the military, disabled, or in the intelligence community, then this rule doesn’t affect you. You still qualify for the exemption.
- You owned the house for less than two years.
- You are paying expatriate tax.
- You bought the house through a 1031 exchange in the past five years.
How to Figure Out Your Capital Gain
To figure out your capital gain, a few pieces of information are needed.
These include the original price you purchased the home for, the commissions you paid at that time, the current purchase price of the home, and any home improvements made during the time you owned the home. You will need to have receipts for these costs.
Take the current purchase price of the home and subtract what you originally paid commissions and all the home improvements that you have paperwork proving you paid for. Then, if you qualify for an exemption, subtract that amount.
Whatever is left over is the amount of money you’ll need to pay capital gains tax on.
Don’t Let the Paperwork Overwhelm You
Always remember that there are people who work in real estate who handle this paperwork every day.
If you are feeling confused or overwhelmed by any of this, consult a tax professional who can help you straighten out exactly what you need to do to be sure your taxes are completely handled.
📞 Have Questions? Ask The Chris Eckert Real Estate Team
Give The Chris Eckert Real Estate Team a call today at 650.627.3799 to learn more about local areas, discuss selling a house, or tour available homes for sale.