All capital gains made in California are subject to regular income tax. When an asset is sold for more or less than you paid to get it, you may have made capital gains or losses. When you sell an object for more money than you paid for it, this is known as a realized gain, and is subject to tax.
California’s Capital Gains Tax Rate
Contrary to federal capital gains taxes, California’s capital gains tax rate for 2022 is independent of the gain’s duration. The profit you realize from the sale of particular assets, such as stocks, bonds, mutual funds, and real estate, is subject to the capital gains tax rate in California. The capital gains tax rate (1%–13.3%) is in line with California’s standard income tax rules.
These California capital gains tax rates may be less than the 0%, 15%, and 20% federal capital gains tax rates for long-term gains (assets held for more than a year). The distinction is that only taxable income over $425,800 (for single filers) or $481,601 is subject to the federal capital gains tax rates (for joint filers).
Comparing the CA Capital Gains Rate in 2022 to Prior Years
The actual tax rates don’t vary much in California since capital gains are treated as normal income. Instead, the standards that determine how much tax you must pay have evolved over time. For instance, the tax rate on $100,000 in long-term capital gains was 9.3% in both 2018 and 2022, but the maximum amount of income that could be earned at this rate in each year was $268,749 in 2018 and $312,686 in 2022.
Other Big U.S. States vs. California
Now let’s contrast the capital gains tax rate in California with that in other sizable states:
- Texas does not impose a capital gains tax
- Nyc: 12.70%
- Between 0% to 20% for Florida.
It’s crucial to remember that all states have the same federal capital gains tax rates.
Despite the fact that California’s capital gains tax is taxable as regular income, it is more expensive than those in other states. In contrast to a state like Texas, it can actually be rather expensive for certain people to pay capital gains on their numerous investments.
How the Capital Gains Tax in California Operates
The profit from selling specific assets, such as stocks, bonds, and real estate, is subject to California’s capital gains tax. Since it is subject to regular income tax, the rate may change. You must be aware of your marginal tax bracket in order to compute your capital gains taxes in California.
When capital assets located in California are sold or exchanged, the California capital gains tax is levied. The following formula is used to determine the tax:
Capital Gain = Sale Price of Asset – (Adjusted Basis + Selling Expenses)
For illustration, suppose you paid $500,000 for a home in Los Angeles and later sold it for $700,000. ($700,000 – $500,000) would be a $200,000 capital gain for you. Your capital gain would drop to $180,000 if you had selling costs of $20,000 (such real estate commissions). Additionally, your capital gain would be further diminished to $130,000 if your adjusted basis was $250,000 (i.e., the purchase price plus capital improvements).
Making the CA Capital Gains Tax Calculation
The sale price of the asset is subtracted from the cost basis to determine the California capital gains tax. The asset’s cost basis includes the price you paid for it as well as any upgrades you made. Your capital gain, for instance, would be $50 if you purchased a stock for $100 and it rose in value to $150. Your capital gain would be $100,000 if you sold a piece of real estate for $500,000 and your cost basis was $400,000.
Your taxable income determines the capital gains tax rate that you must pay on your capital gain. To determine how much of the gain you’ll be taxed on (between 1% and 13.3%), apply your standard tax bracket rate.
California’s capital gains tax rates for short-term and long-term gains
Contrary to the federal rate, California does not have a different capital gains tax based on how long you have owned the asset. Everyone is subject to taxation at the standard income rates in California since capital gains are treated as ordinary income. As was already mentioned, these tax rates range from 1% to 13.3%.
Depending on how long you hold an asset before selling it, the capital gains tax rate under the federal system may change. Only if you keep an asset for more than a year do the long-term capital gains tax rates come into play. People who desire to keep their assets for extended periods of time will benefit from this. Contrarily, taxes on gains made in less than a year are subject to short-term capital gains tax.
Real Estate Capital Gains Tax in California
Because of the potential exemption, the California capital gains tax on real estate differs from the standard capital gains tax. The tax is computed by taking the property’s purchase price, deducting any modifications made to it, and then deducting the sale price. People who sell residences they resided in might not be required to pay the tax at all.
If a single homeowner satisfies the prerequisites, such as residing in the property for at least two of the previous five years, they may deduct up to $250,000 of gains from the sale of their property. Every couple is permitted to deduct gains up to $500,000. This is advantageous to those who invested time and money into residing in and renovating their property.
