Taxes When Selling a House in California

TL;DR: California home sellers can face federal capital gains tax, California income tax on the gain, county and city transfer taxes, and property tax prorations at closing. Most owner-occupants who have lived in the home at least two years can exclude up to $250,000 in gain (single) or $500,000 (married filing jointly) from federal tax [1]. Understanding each layer before you list prevents surprises at the closing table.

Key Takeaways

• Single filers who meet the ownership and use test may exclude up to $250,000 in gain from federal tax, while married couples filing jointly may exclude up to $500,000 [1].
• California taxes capital gains as ordinary income — there is no preferential state rate — so sellers with large gains should plan for a meaningful state bill on top of the federal one.
• Transfer taxes are paid at closing and vary by county and city; sellers along the I-680 corridor in Contra Costa County should confirm whether their city levies an additional transfer tax beyond the county rate.
• Federal long-term capital gains rates for 2026 range from zero percent to twenty percent depending on taxable income and filing status.
• A free home valuation before you list helps you estimate your potential gain and plan for the tax consequences months in advance.

What Taxes Do You Pay When Selling a House in California?

When selling a house in California, you may owe taxes in four distinct categories: federal capital gains tax, California state income tax on the gain, transfer taxes collected at closing, and a prorated share of property taxes through the date of sale. Not every seller owes all four, and the federal exclusion eliminates the biggest one for most primary-residence sellers. But if your home has appreciated significantly — common along the I-680 corridor, where median prices in Alamo and Danville regularly clear seven figures — you need to understand each layer.

The rest of this post walks through each tax a California seller may encounter, the exclusions and deductions that can reduce the bill, and the steps you can take before listing to avoid surprises.

How Does the Federal Capital Gains Exclusion Work?

The single most important tax benefit for home sellers is the federal primary-residence exclusion under IRS Section 121. If you qualify, you may exclude the first $250,000 of gain from the sale of your home from your income, or up to $500,000 if married and filing jointly [1].

To qualify, you must pass two tests during the five-year period ending on the date of sale:

• Ownership test: You owned the home for at least two of those five years.
• Use test: You used the home as your primary residence for at least two of those five years.

The two years do not need to be consecutive. If you rented the home out for a stretch but moved back in before selling, you may still qualify as long as the cumulative residency adds up. You also cannot have claimed the exclusion on another home sale within the two years preceding this sale.

For most long-time homeowners in the East Bay — people who bought in Walnut Creek or Danville a decade or more ago — the ownership and use tests are straightforward. The question is whether the exclusion covers the full gain, given how much Bay Area home values have climbed.

What Are the Federal Capital Gains Tax Rates for 2026?

Any gain above the exclusion is taxed at federal long-term capital gains rates, assuming you owned the home for more than one year. For 2026, the rate you pay depends on your taxable income and filing status.

The rate you pay applies to your total taxable income, not just the gain from the home sale. That means the gain stacks on top of your wages, retirement distributions, and other income for the year. A couple earning moderate wage income might find that their home sale gain pushes part of it into the fifteen or twenty percent bracket even though their ordinary income alone would qualify for the zero percent rate.

Depreciation recapture

If you ever claimed depreciation on part of the home — a home office, a rental conversion, an accessory dwelling unit — the depreciation you deducted must be recaptured and taxed as unrecaptured Section 1250 gain. This portion is not eligible for the exclusion. A seller who claimed depreciation deductions while renting the property must recognize that depreciation as gain even if the rest of the profit falls within the exclusion.

Does California Tax Your Home Sale Profit?

Yes. California does not offer a preferential rate for capital gains. The state taxes gains as ordinary income, which means the rate depends on your overall California adjusted gross income and filing status. For sellers with large gains — and in towns like Alamo and Blackhawk, a gain well above the federal exclusion is not unusual — the state layer can be the second-largest tax cost of the sale.

California does honor the federal Section 121 exclusion. Only the gain above that threshold is subject to California income tax.

California withholding

California requires escrow to withhold a percentage of the sale price for sellers in certain situations. The most common triggers are non-resident sellers and sales above a specific price threshold. Many owner-occupant sellers who have lived in the home and will file a California return qualify for an exemption from this withholding, but you need to sign the correct form at escrow. If withholding does apply, the amount is credited against your state tax liability when you file — it is a prepayment, not an additional tax.

What About Transfer Taxes and Other Closing Costs?

Transfer taxes in California are assessed at the county level, and some cities add their own levy on top. In Contra Costa County, sellers pay a documentary transfer tax based on the sale price. Unlike capital gains, this tax applies to every sale regardless of how long you owned the home or how much you gained.

If you are selling in Alamo, Danville, or Walnut Creek, the county transfer tax is your primary concern — none of these communities currently charges a supplemental city transfer tax the way some other Bay Area cities do. But this can change with a ballot measure, so confirm the current rates with your escrow officer before listing.

Transfer taxes are typically the seller’s responsibility in our market, though the allocation can be negotiated. They show up on the settlement statement and are paid from the seller’s proceeds at closing.

Beyond transfer taxes, sellers also face other closing costs that eat into net proceeds. These include escrow fees, title insurance, and any outstanding liens or HOA charges. Total selling costs, including agent commissions and these transactional expenses, commonly run approximately seven percent of the sale price. On a home that sells for over a million dollars in the San Ramon Valley, that adds up quickly, and it is worth running the numbers before you commit to a listing price. Our pricing strategy page walks through how we approach this analysis for sellers along the I-680 corridor.

How Do Property Tax Prorations Work at Closing?

Property taxes in California are paid in arrears — the first installment covers July through December and is due in November, and the second installment covers January through June and is due in February. When you sell mid-cycle, the property taxes are prorated between buyer and seller through escrow.

If you have already paid the installment covering the closing date, escrow will credit you for the days the buyer will own the home during that period. If the installment has not yet been paid, escrow will debit your share from your proceeds and credit the buyer.

For sellers in Contra Costa County, this is typically straightforward. Your escrow officer handles the calculation. The important thing to understand is that property tax prorations are not a “tax on selling” — they are simply a true-up to make sure each party pays for the days they actually owned the home.

Prop 19 and the buyer’s basis

While Prop 19 primarily affects the buyer’s future property tax basis — particularly for inherited properties and senior transfers — it can matter in a sale if you are selling an inherited home and deciding whether to retain or transfer the property tax basis. If you inherited a home along the I-680 corridor and are considering selling, the interplay between Prop 19 and your capital gains basis (which stepped up at the date of death) is worth reviewing with a tax advisor before listing. Our post on Mello-Roos and tax districts in the East Bay covers a related piece of the property tax puzzle.

How Can You Reduce Your Tax Bill Before Selling?

The most effective strategies are straightforward:

• Track your cost basis accurately. Your basis is not just what you paid for the home. It includes the cost of capital improvements — a new roof, a kitchen remodel, an added bathroom — that you made over the years. Every dollar added to your basis reduces your taxable gain by a dollar. Keep records of permits, contractor invoices, and receipts.
• Time the sale relative to your income. Because federal capital gains rates depend on your total taxable income for the year, a sale in a year when your other income is lower can mean a lower rate on the gain. Retirees who have stopped drawing a salary sometimes benefit from this timing.
• Use the exclusion fully. If you are close to the two-year ownership or use threshold, waiting a few months to sell can mean the difference between owing capital gains tax and owing nothing on a gain below the exclusion amount.
• Consult a CPA before listing, not after closing. A tax advisor who knows California rules can model your specific situation — your basis, your gain, your income, your filing status — and tell you what to expect. This is especially important for sellers with rental history on the property, partial-year residency, or depreciation to recapture.

Our team has closed 529 MLS transactions totaling $527.4 million between 1996 and 2024, and in nearly every one of those sales, the sellers who had the smoothest closings were the ones who talked to their CPA before the sign went in the yard, not after the offer was accepted.

Why This Matters

As of November 2026, Bay Area home values remain elevated, and many long-time homeowners along the I-680 corridor are sitting on gains that far exceed the federal exclusion. Layer California’s income tax on top of the federal rate, add transfer taxes and closing costs, and the total tax and transaction burden can reach a meaningful share of the sale price.

None of this means you should not sell. It means you should sell with a clear picture of what you will net. A home valuation gives you the starting number. A conversation with your CPA gives you the tax estimate. And a listing agent who has worked this corridor — who understands the pricing, the neighborhoods, and the costs specific to Contra Costa County — makes sure the sale itself is structured to protect your proceeds.

If you are weighing a sale in Alamo, Danville, Walnut Creek, or anywhere along the I-680 corridor, we are happy to walk through the numbers with you. The tax picture is one piece; the pricing and preparation strategy is another, and getting both right is what separates a good outcome from a great one.

Sources

[1] irs.gov, “Publication 523 (2025), Selling Your Home | Internal Revenue Service”. https://www.irs.gov/publications/p523