Selling a Home in California: Capital Gains, Withholding & Taxes for 2026–2027

By Ramez Malki, Broker — C&R Properties  |  Updated October 26, 2026

Most Orange County sellers who have lived in their home for years owe less tax than they fear, and some owe nothing at all. The exceptions are big gains above the federal exclusion, rentals and second homes, sellers who have moved out of state, and inherited property. This guide walks through each one with current 2026 rules, so you can estimate your number before you talk to your CPA.

1. The taxes a California seller can face

• Federal income tax on the gain, at 0%, 15% or 20% for homes held more than a year, plus the 3.8% Net Investment Income Tax for higher earners.
• California income tax on the gain. California has no lower capital-gains rate, so taxable gain is added to your other income and taxed at your regular rate, up to 13.3%.
• California real estate withholding collected by escrow at closing (a prepayment, not an extra tax).
• FIRPTA withholding if the seller is a foreign person.
• Documentary transfer tax recorded with the deed.

2. How your gain is calculated

Your gain is not the sale price minus what you paid. It is:

Amount realized (sale price minus selling costs such as commissions, escrow, title and transfer tax) minus adjusted basis (purchase price plus purchase closing costs plus capital improvements, minus any depreciation you claimed).

Capital improvements are things that add value or extend the home’s life: a remodel, room addition, new roof, solar, new HVAC, an ADU, a pool. Routine repairs and maintenance don’t count. If you’ve owned your home for decades, gather receipts now. A $150,000 kitchen and bath remodel from 2009 reduces your taxable gain by $150,000.

Without the improvement receipts, the taxable gain in this example would be $384,000. Records matter.

3. The $250,000 / $500,000 home-sale exclusion (Section 121)

To claim the full exclusion you must pass both tests during the 5 years before the sale:

• Ownership: you owned the home for at least 2 years (24 months).
• Use: you lived in it as your main home for at least 2 years. The two years don’t need to be continuous or the same two years as ownership.
• You haven’t used the exclusion on another home in the last 2 years.

Married couples get $500,000 when they file jointly, both meet the use test, and at least one meets the ownership test. A surviving spouse can still claim $500,000 if the home sells within 2 years of the spouse’s death.

A partial exclusion may apply if you sell early because of a job change, health reasons or certain unforeseen circumstances. The exclusion amounts are not indexed to inflation. They have been the same since 1997, which is why more long-time Orange County owners now have gain above the limit.

4. Federal and California rates on gain above the exclusion

Federal

Gain on a home owned more than one year is long-term capital gain, taxed at 0%, 15% or 20% depending on taxable income. Higher-income sellers may also owe the 3.8% Net Investment Income Tax on the taxable part of the gain (the excluded portion is not subject to it).

California

California follows the federal exclusion, but it taxes any remaining gain as ordinary income at rates up to 13.3%. A large sale can push you into a higher state bracket for that year.

Using the example above, $244,000 of taxable gain for a couple with $200,000 of other income might mean roughly $36,600 federal (15%), about $7,400 of Net Investment Income Tax, and about $22,000 to $24,000 California. Your CPA can model your exact brackets, and timing (selling in January vs. December, or in a lower-income retirement year) can change the result.

5. California withholding at closing (Form 593)

Unless an exemption applies, escrow must withhold 3⅓% of the total sales price and send it to the Franchise Tax Board. You can instead elect to withhold on the estimated gain (12.3% for individuals). It’s a prepayment that you claim on your California return.

Common exemptions you certify on Form 593:

• Principal residence: you owned and lived in it for 2 of the last 5 years, or it was last used as your principal residence. Vacation homes and rentals don’t qualify for this one.
• Sale price of $100,000 or less.
• Loss or zero gain on the sale.
• A qualifying 1031 exchange (withholding still applies to cash boot over $1,500).

For tax years starting January 1, 2026, the FTB increased penalties for failing to file required information returns, so complete Form 593 accurately with your escrow officer.

6. Foreign sellers: FIRPTA

If the seller is a foreign person, the buyer generally must withhold 15% of the amount realized under FIRPTA. (Some older California charts still say 10%; that rate was replaced years ago.) There are two important exceptions when the buyer will live in the home: no withholding if the price is $300,000 or less, and a reduced 10% rate if the price is over $300,000 and up to $1,000,000. The seller can apply to the IRS to reduce withholding to the actual expected tax.

7. Moved out of California? You still owe California

Gain from selling California real estate is California-source income even if you now live in Nevada, Arizona or Texas. You’d file a nonresident return (Form 540NR) and report the gain. The principal-residence withholding exemption can still apply if the home was the last place you lived as your principal residence, but the tax itself isn’t avoided by moving.

8. Rentals, second homes and depreciation recapture

• A rental or second home gets no Section 121 exclusion.
• Depreciation recapture: depreciation you claimed (or could have claimed) is taxed federally at up to 25%. California taxes it as ordinary income.
• Former rentals you moved into: if you rent a home first and live in it later, part of the gain can be “nonqualified use” that the exclusion doesn’t cover. If you lived in it first and rent it after you move out, there’s usually no reduction as long as you still pass the 2-of-5-year test.

9. Deferring tax on investment property: the 1031 exchange

A 1031 exchange lets you defer gain on investment or business real estate by buying like-kind property. The key deadlines: identify replacement property within 45 days and close within 180 days of the sale, using a qualified intermediary. Your primary residence doesn’t qualify. If you exchange California property for property in another state, California requires an annual information return (FTB Form 3840) and can tax the deferred California gain when you eventually sell.

10. Inherited homes: the step-up in basis

When you inherit a home, your tax basis generally “steps up” to the market value on the date of death. If you sell soon after, there’s often little or no gain to tax. In California, a community-property home owned by a married couple can receive a full step-up on both halves at the first spouse’s death, while joint tenancy usually steps up only the deceased spouse’s half. How a couple holds title can be worth hundreds of thousands of dollars in later taxes. See our probate and trust sales guide for the selling side.

Property tax is a separate question. Under Proposition 19, a child who inherits a parent’s home keeps the parent’s assessed value only if they move in as their principal residence, and only up to a value limit. Details are in our Prop 19 guide.

11. Transfer tax in Orange County

Orange County’s documentary transfer tax is $1.10 per $1,000 of the sale price ($1,650 on a $1.5 million sale). No Orange County city adds its own city transfer tax, unlike Los Angeles, Culver City or Santa Monica. Who pays is negotiable, but in Southern California the seller usually pays it. Confirm the figure with your escrow officer.

On the policy front, the California Association of REALTORS^® worked to defeat AB 736, which would have let cities raise transfer taxes, and C.A.R. has listed reforming capital-gains taxes on primary residences as part of its housing agenda. A November 2026 ballot measure also addresses the vote threshold for certain local special taxes. We’ll update this guide if any of these change the rules for sellers.

12. A seller tax checklist

1. Find your purchase closing statement and every receipt for capital improvements.
2. Confirm you meet the 2-of-5-year ownership and use tests (or a partial exclusion reason).
3. Estimate your gain using a realistic sale price. Request a free home value to start.
4. Ask your CPA whether the timing of the sale (tax year, retirement income) changes your bracket.
5. Tell your escrow officer early which Form 593 exemption applies, or whether FIRPTA applies.
6. For rentals, ask about depreciation recapture and whether a 1031 exchange fits.
7. If the home was inherited, get a date-of-death appraisal for the stepped-up basis.

Frequently Asked Questions

Do I pay capital gains tax when I sell my house in California?

Only on gain above the federal exclusion: $250,000 for single filers or $500,000 for married couples filing jointly, if you owned and lived in the home at least 2 of the last 5 years. Gain above that is taxed federally as a capital gain and by California as ordinary income.

Does California have a capital gains tax rate?

No separate rate. California taxes capital gains as ordinary income at your regular state rate, up to 13.3%.

Will escrow withhold 3⅓% from my sale proceeds?

Only if no exemption applies. Sellers of a principal residence they owned and lived in 2 of the last 5 years, sales of $100,000 or less, and sales at a loss are among the common exemptions certified on FTB Form 593.

I moved out of California. Do I still owe California tax on the sale?

Yes. Gain on California real estate is California-source income, so you file a nonresident return (Form 540NR) for the year of the sale.

What is the FIRPTA withholding rate in 2026?

15% of the amount realized for foreign sellers, with no withholding on buyer-residence sales of $300,000 or less and a 10% rate for buyer-residence sales between $300,000 and $1,000,000.

Do I pay tax when I sell a house I inherited?

Often very little, because your basis generally steps up to the market value at the date of death. You’re taxed only on gain after that date, minus selling costs.

Who pays transfer tax in Orange County?

It’s negotiable, but the seller customarily pays the county documentary transfer tax of $1.10 per $1,000. No Orange County city adds a city transfer tax.

This article is general information, not legal or tax advice. Laws and figures change; confirm details for your situation with a qualified California attorney or CPA. Ramez Malki is a real estate broker and mortgage professional, not an attorney or tax advisor.