Most Chico homeowners owe no federal capital gains tax on the sale of their primary home. If you owned and lived in it for at least 2 of the last 5 years, you can exclude up to $250,000 of profit ($500,000 for married couples filing jointly). Only gain above that amount is taxed. California follows the same exclusion.
Who qualifies for the $250,000 / $500,000 exclusion?
You generally need to pass two tests. The ownership test: you owned the home for at least 2 of the 5 years before the sale. The use test: you lived in it as your main home for at least 2 of those 5 years. The two years do not have to be back to back. For the $500,000 limit, you file jointly, either spouse meets the ownership test, and both spouses meet the use test. You can generally use the exclusion once every 2 years.
How is my gain actually calculated?
Your gain is the sale price, minus selling costs, minus your adjusted basis. Your basis is what you paid, plus closing costs from your purchase, plus the cost of capital improvements. A new roof, an addition, or a kitchen remodel can raise your basis. Routine repairs and paint usually do not. Keep your receipts. With a construction background, I tell sellers the same thing every time: the paper trail on improvements is what saves you money at tax time.
Selling costs matter too. See what it costs to sell a house in Chico to estimate what comes off your gain.
What if my gain is more than the exclusion?
The amount above $250,000 or $500,000 is a capital gain. If you held the home more than a year, it is a long-term gain taxed at federal rates of 0%, 15%, or 20% depending on your income. Higher earners may also owe the 3.8% net investment income tax. California does not have a separate lower rate for capital gains, so the state taxes the gain as regular income. A Chico home bought many years ago can build up more equity than people expect, so run the numbers before you list.
What about rental properties or second homes?
The exclusion applies only to your primary home. Rentals do not qualify, and depreciation you claimed is recaptured when you sell. If you are selling an investment property, a 1031 exchange may let you defer the tax. A home you lived in and later rented out can still qualify in some cases, if you meet the 2 of 5 year test.
Does selling affect my property taxes?
Selling does not change your own tax bill, but your next home's property tax will be based on its purchase price.
This post is general information, not tax advice. Check your numbers with a CPA before you sign a listing agreement.
Frequently Asked Questions
Do I have to report the sale if I owe no tax?
Sometimes. If you receive a Form 1099-S or your gain exceeds the exclusion, you generally must report it. Ask your CPA.
Can I use the exclusion if I lived in the home less than 2 years?
A partial exclusion may apply for certain reasons such as a job change, health, or unforeseen circumstances. A CPA can confirm.
Do home improvements reduce my capital gain?
Capital improvements add to your basis, which lowers your gain. Routine maintenance does not.
Should I talk to a tax professional before listing?
Yes. This post is general information, not tax advice. Check your numbers with a CPA before you sign a listing agreement.
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