California Capital Gains Tax: A Comprehensive Guide

Making a profit on real estate, stocks, or other investments can significantly shape your long-term financial picture. However, those gains often come with added tax responsibility—especially if you live in a state like California, where even moderate-income increases can lead to higher tax rates.

While every financial situation is different, it’s helpful to understand the broader framework for how capital gains are taxed in California. Knowing what to expect before you sell can put you in a stronger position when it’s time to pay taxes—especially if your profits push your income into a higher bracket.

How Much Is Capital Gains Tax in California?

California taxes capital gains the same way it taxes wages—by treating them as regular income. This means any profit from selling stocks, bonds, real estate, or other assets is taxed according to the state’s ordinary income tax rates.

There is no distinction between short-term and long-term capital gains tax rates for 2025 at the state level. Whether you held the asset for one week or 15 years, your gain is taxed as part of your taxable income under the state’s progressive system. If your profit is significant, it can move you into a higher tax bracket, which affects how much you’ll ultimately owe on your tax returns.

Here’s a simplified look at California’s 2025 personal income tax brackets for single filers, which also apply to capital gains:1

• 1% rate
  Income up to $10,756
• 2% rate
  $10,757 – $25,499
• 4% rate
  $25,500 – $40,245
• 6% rate
  $40,246 – $55,866
• 8% rate
  $55,867 – $70,606
• 9.3% rate
  $70,607 – $360,659
• 10.3% rate
  $360,660 – $432,787
• 11.3% rate
  $432,788 – $721,314
• 12.3% rate
  $721,315 – $1,000,000
• 13.3% rate (includes 1% Mental Health Services Tax)
  Over $1,000,000

Federal Capital Gains Tax Rates for 2025

Unlike California, the federal government bases capital gains taxes on holding periods. For 2025, there is a clear distinction between short-term and long-term capital gains tax rates, which can influence your timing strategy when it comes to selling investments.

Short-Term Capital Gains

If you hold an asset for a year or shorter, your gain is taxed as regular income. These profits are subject to the same income tax rates and can push you into a higher tax bracket, especially if the gain is significant. Short-term capital gains can be taxed at rates ranging from 10% to 37%, depending on your total income.2

Long-Term Capital Gains

If you hold the asset for longer than a year, your gain is typically taxed at a reduced rate. These federal capital gains tax rates for 2025 vary by income and filing status:3

• 0% rate
  • Single: $0 – $48,350
  • Married filing jointly: $0 – $96,700
  • Married filing separately: $0 – $48,350
  • Head of household: $0 – $64,750
• 15% rate
  • Single: $48,351 – $533,400
  • Married filing jointly: $96,701 – $600,050
  • Married filing separately: $48,351 – $300,000
  • Head of household: $64,751 – $566,700
• 20% rate
  • Single: $533,401+
  • Married filing jointly: $600,051+
  • Married filing separately: $300,001+
  • Head of household: $566,701+

Please Note: In addition, higher earners may face the net investment income tax (NIIT)—an extra 3.8% federal surcharge that applies to capital gains and other passive income if your modified adjusted gross income (MAGI) exceeds certain thresholds. Additionally, long-term gains on certain tangible assets like art, rare coins, or precious metals may face a higher maximum tax rate of 28% rather than the usual capital gains rates.3

Capital Gains Tax on Real Estate in California 

Selling real estate in California can lead to unique considerations regarding these gains. The state’s treatment of home sales and investment properties plays a major role in how much tax you’ll owe. Additionally, homeowners might wonder how federal rules, such as exclusions for a primary residence, apply at the state level. This section will look at several areas that often spark questions regarding these topics:

Exclusions for primary residences: Federal guidelines allow you to exclude up to $250,000 of capital gains on the sale of a qualifying primary residence if you file singly, and up to $500,000 if married and filing jointly. California generally aligns with this approach. However, if your gain exceeds these amounts, the state taxes that extra portion as ordinary income. 

Rental property sales and depreciation recapture: When you sell rental property, you’ll owe capital gains tax not only on the property’s appreciation but also on the depreciation you claimed during ownership. At the federal level, this “depreciation recapture” is taxed separately at your ordinary income tax rate, capped at a maximum of 25%.4 California, however, does not apply a distinct recapture rate. Instead, the entire gain—including the depreciation portion—is added to your ordinary income and taxed according to your state income bracket.

Inherited real estate and step-up in basis: If you inherit property, the basis is “stepped up” to fair market value at the time of inheritance. California follows federal guidelines here, which can reduce or eliminate the gains if you decide to sell soon afterward. Still, if the property appreciates further after the date of inheritance, you’ll owe tax on that portion of the profit.

1031 exchanges: You can defer the gain from selling a property if you purchase a “like-kind” property under Section 1031. This approach lets you delay paying taxes to both the federal government and the state, though California will require tracking the deferred gain. If the replacement property is located out-of-state and subsequently sold in a taxable transaction, California will require taxes on the originally deferred gain through its clawback provision..

How to Calculate Capital Gains in California 

Figuring out your gains means looking at costs, improvements, and various adjustments that can raise or lower your final profit. The process typically starts with federal calculations and flows through to California’s tax return. It helps to have solid documentation—especially when assets have been held for an extended time or in cases where improvements have increased their value:

Cost basis and recordkeeping

Your cost basis typically starts with the purchase price. If you bought a property or set of shares, that initial figure is your baseline. For property, any improvements that add to the property’s value (such as a home remodel) increase your basis. If you have sold or upgraded part of an asset, thorough records will help confirm the correct amount.

Adjustments to basis

Various expenses, including realtor commissions, closing fees, or renovation costs, can boost your basis, which reduces the ultimate gain. It’s wise to keep receipts and documentation for these transactions because forgetting them can lead to paying tax on more profit than you truly earned.

Depreciation recapture implications

For rental or business property, you might have taken depreciation deductions over time. That amount comes back into play at the point of sale, increasing the reported gain. At the federal level, recaptured depreciation may be taxed at an increased rate that caps out at 25%. The amount is also included in your California return, where it is taxed as ordinary income.

Federal calculation followed by state taxation

Once the total gain is determined under federal rules, California treats the profit differently. While federal tax rules give preferential treatment to long-term investments, California does not distinguish between holding periods. Instead, the entire amount is taxed as ordinary income under the state’s progressive tax rates for long and short holdings alike.

Strategies to Reduce Capital Gains Tax in California

Selling a property or investment and then handing over a significant portion of your profit is never ideal. Fortunately, there are tactics that could lessen how much you owe. Some of these options apply primarily at the federal level but can still influence your financial decisions—especially since California taxes capital gains as ordinary income. While the state won’t cut you a break on the rate, reducing your taxable gains can still lower what you owe overall.

Here are some strategies you have at your disposal:

Tax-loss harvesting

If you have positions in your portfolio that are underwater, selling those losing investments may offset some of your gains for the year. You cannot buy the same or a substantially identical security shortly before or after this sale, but you might opt to reinvest in something similar. Using this method, you can soften the blow of your overall gain, reducing the amount the state will see as income.

Holding period

Many investors try to keep assets for over one year so that gains qualify for the lower federal rate. While California does not differentiate between shorter or longer terms, your federal liability could still shrink by waiting. Delaying a sale may also help if you expect lower income in a future year, making the overall tax impact more manageable.

Installment sales strategy

Sometimes, sellers choose to spread the proceeds of a sale over multiple years, so the total profit doesn’t land in a single return. If you have a buyer willing to pay in installments, you can tackle your obligations more gradually. This method keeps you from receiving a lump sum that might otherwise push you into a higher bracket right away.

Charitable giving of appreciated assets

Donating appreciated assets—like shares of stock—to a qualified organization may help you sidestep a tax hit on the built-in gain. You typically receive a deduction for the full market value, avoiding the gain recognition that would come with selling first. While this is a federal concept, it indirectly affects what shows up on your California forms, as the gain never appears.

Gifting to lower-income family members

In certain instances, families may gift assets to relatives in lower brackets to reduce the total amount owed across the family as a whole. If the recipient sells later, their rate could be lower. This practice must be approached carefully because transferring valuable property does have potential impacts—particularly if the family member also resides in California.

Using donor-advised funds or charitable trusts

High-net-worth individuals sometimes look to donor-advised funds or charitable trusts as ways to donate assets without triggering immediate gains. Donor-advised funds let you contribute stock or other property and then distribute money to charities over time. These paths can result in a smaller overall tax bill, especially when combined with proper planning at the federal level.

Coordinating with retirement timelines

Your overall earnings may drop once you scale back on work. If you wait until a year when you expect less income, your sale could come with fewer overall taxes. This is especially relevant if you plan to take bigger withdrawals from retirement accounts in the future. Timing large transactions during low-income years may help limit the portion of your gain taxed at higher rates.

Additional Exemptions and Special Situations 

Certain rules can affect how California taxes your investment gains. For example, while federal law under Section 1202 may allow you to exclude some or all of the gain from selling Qualified Small Business Stock (QSBS), California does not conform to this rule.5 So, even if you’re exempt at the federal level, the gain may still be taxable by the state.

Additionally, retirement accounts like IRAs and 401(k)s allow you to defer taxes on investment gains until withdrawal. When you begin withdrawing funds, the entire distribution is treated as regular income for tax purposes—not as capital gains. Taking out a significant amount in a single year can bump your income into a higher bracket, leading to a larger overall tax bill.

Capital Gains Tax in California FAQs 

Many people have common follow-up questions once they realize how California treats profits on the sale of property or investments. Below are a few that frequently arise.

1. Do I owe capital gains tax if I sell my California home?

If the property qualifies as your primary residence, you may exclude up to $250,000 of gains if you file singly or $500,000 if married and filing jointly. Anything above those amounts will be included as regular income on your state return. Since there are no reduced rates, you might find that a large gain pushes you into a higher bracket.

2. Does California tax out-of-state capital gains?

California generally taxes all income for residents, regardless of where the income is earned. This includes gains from property or investments in other states. If you leave California before the sale takes place, you may avoid that obligation. However, your residency status at the time of sale is extremely important to whether the state can claim a share.

3. What happens if I move out of California before selling an appreciated asset?

California will still tax the sale of real property located within the state—even if you’ve moved—since the income is sourced to California. However, for intangible assets like stocks, if you sell after establishing residency elsewhere, the gain may not be taxable by California.

4. How are capital gains treated for inherited property in California?

Heirs receive a step-up in basis, which is typically the fair market value at the time of the previous owner’s death. If you sell soon after inheriting, any gain might be small or nonexistent. Still, if the inherited property appreciates further after the inheritance date, only the appreciation after the step-up valuation is taxable.

5. Can capital gains push me into a higher California tax bracket?

Yes. Since the state counts these gains alongside all other income, your total for the year can go up dramatically. A large gain could make you owe at the highest rates, depending on your unique circumstances.

Let us Help You With Capital Gains Tax Planning in California

California’s tax treatment of capital gains can catch investors off guard—particularly because the state’s rules differ sharply from those at the federal level. Whether you’re preparing to sell a rental property, cash out stock, or manage business interests, understanding how timing, income, and asset type impact your tax bill is an important step in protecting your return.

From federal surcharges to depreciation recapture and bracket shifts, the details can add up quickly. A proactive plan—whether through charitable giving, installment sales, or coordinating with lower-income tax years—can help reduce the impact of these taxes and keep more of your gains working for you.

Our financial advisory team can work with you to weigh these strategies, evaluate your full tax picture, and coordinate with your accountant or estate planner as needed. Whether you’re managing a one-time windfall or developing a long-term investment strategy, we’re here to help you approach decisions with clarity and confidence.

Schedule a complimentary consultation with our team today to get personalized guidance on how to keep more of what you’ve earned—and to make your next move with purpose.

Resources:

1. https://states.aarp.org/california/state-tax-guide
2. https://turbotax.intuit.com/tax-tips/investments-and-taxes/guide-to-short-term-vs-long-term-capital-gains-taxes-brokerage-accounts-etc/L7KCu9etn
3. https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates
4. https://www.schwab.com/learn/story/understanding-depreciation-recapture-on-rentals
5. https://www.roberthalltaxes.com/news/californias-stance-on-qualified-small-business-stock-qsbs-tax-exemptions-in-2025/#:~:text=In%20response%2C%20California%20eliminated%20QSBS,of%20their%20federal%20exemption%20status