Selling a long-held Bay Area property can feel like a major financial milestone, especially after years of appreciation. At the same time, it can raise a question: how much of the proceeds will you actually keep after taxes?
Here are the key issues to consider before liquidating appreciated real estate.
Calculate your taxable gain before selling
Your taxable gain depends on your adjusted basis and the amount you receive from the sale, not simply the property’s sale price. Your basis generally starts with what you paid and can change after certain improvements, depreciation and other adjustments. Selling costs may also reduce the gain you report.
For an investment property, gather:
- Purchase and improvement costs
- Depreciation claimed or allowable
- Certain costs connected to the sale
Good records can help support your calculation if the IRS or California Franchise Tax Board later questions the gain.
Understand the federal and California tax impact
A large gain can create tax exposure at both federal and California levels. Federal rules generally give qualifying long-term gains lower tax rates than ordinary income. California, however, treats capital gains as ordinary income and does not offer a separate lower rate. Its top personal income tax rate reaches 13.3%.
If you sell a qualifying main home, federal law may let you exclude some of the gain from taxable income. The exclusion can reach $250,000 for an eligible individual or $500,000 for qualifying joint filers who meet ownership and use rules.
Explore planning options before closing
Tax planning before closing gives you time to review strategies that could reduce or defer the tax you owe. For qualifying investment or business property, Section 1031 may let you defer eligible gain when you exchange the property for qualifying replacement property. This approach generally postpones the tax rather than erasing the gain.
You can review the timing of the sale and your expected income for the year before you sign.
Report the sale accurately to avoid tax disputes
Accurate reporting helps prevent a property sale from turning into an IRS or FTB dispute. Your reported proceeds, basis and other figures should match the records supporting your return. You may also receive Form 1099-S, which reports proceeds from a real estate transaction and can affect how you report the sale.
Keep your closing statement, improvement records and depreciation information together so you can support the numbers you report.
Plan for the tax consequences before you close
A major real estate sale deserves attention before the closing date, not just when you prepare your tax return. Reviewing your basis, exclusions, deferral options and reporting requirements with an attorney can help you address tax issues while you still have time to plan.