California Capital Gains Tax in 2024: the Ultimate Guide
October 9, 2024
When most people think of California, they think about the weather, the sunshine, the beaches and everything that comes with it. After all, one advantage of California, depending on where you live, is year-round warmth, minimal rainfall and low humidity.
Let’s face it, that’s hard to beat.
If you like the outdoor lifestyle, California is the place to live with beaches, deserts, mountains, lakes and world-class ski resorts. From Disneyland to the glitz of Los Angeles and the culture of San Francisco, California attracts a diverse mix of people.
Another advantage of the Golden State is its job opportunities, especially if you work in the tech, medical, manufacturing or film industries. Around 19 million workers power the Californian economy, the largest in the US with the result that in 2023 California contributed gross domestic product (GDP) of around US$3.23 trillion to the country’s GDP, the most of any state.
So, given these benefits, why are so many people (75,423 in 2023) leaving California? The one-word answer is taxes. With Californians paying federal taxes, sales tax and high state taxes while dealing with the cost of living in the third most expensive state in the US, it is little wonder.
The US already features prominently among countries in the world with highest tax rates. Not only that, it’s one of the only two countries that impose citizenship-based taxation, meaning wherever you go or whatever you do, you will need to report your assets back to the US and typically pay taxes on them.
Moreover, as a US person, you’re subjected to taxes at the federal and state level. Some states have more lenient taxes than others but California isn’t one of those.
It doesn’t have to be this way. Moreover, you don’t have to settle for just relocating to a more tax–friendly state. At Nomad Capitalist we specialise in helping our clients go where they’re treated best and this sometimes means relocating to a new country or planting multiple flags around the the world.
What is Capital Gains Tax?
Capital gains tax is a tax levied on the profit from the sale of an investment. It can be levied on the sale of stocks, real estate, precious metals and other assets.
In essence, capital gains tax is levied on the money earned from investment profits rather than wages and salary. The US imposes federal capital gains taxes and on top of that, based on whichever state you live or work in, you can also be subjected to a state capital gains tax.
Short-Term v Long-Term Capital Gains Tax in California
Typically, capital gains are divided into two categories – long–term capital gains and short–term capital gains. You may be subjected to different capital gains tax rates based on how long you hold your assets.
Long and short–term capital gains tax are broken down in the following way:
- Long-term capital gains taxes are levied on profits from the sale of an asset held for more than a year.
- Short-term capital gains taxes are levied on profits from the sale of an asset typically held for less than a year.
Your taxable income and filing status may influence your capital gains tax rate.
Capital Gains Tax California: Rates in 2024
Each state has its own system and tax brackets for capital gains. Some states may levy a flat tax on a capital gain, while some may not impose it at all. The federal government imposes different tax rates depending on whether the assets were held long-term or short-term.
The federal government taxes short-term gains as regular income. Based on your taxable income, you may be liable to pay over 20% in taxes for assets held for less than a year.
On the other hand, the federal capital gains tax for long-term capital gains is less than ordinary income tax rates and some individual states follow this method.
California taxes capital gains as income and makes no distinction between short or long–term gains. This means that in California capital gains tax rates are similar to state income tax rates.
California has nine tax brackets – 1%, 2%, 4%, 6%, 8%, 9.3%, 10.3%, 11.3% and 12.3%. At the upper limit, a single filer can expect to pay 12.3% on capital gains over US$599,013, while a married couple filing jointly can expect to pay 12.3% on capital gains over US$1,198,025.
Alternatively, at the lower end, single filers can expect to pay 1% on capital gains ranging from US$0 to US$8,932, while a married couple filing jointly can expect to pay 1% on capital gains between US$0 to US$17,864.
How to Calculate Capital Gains Tax in California
California taxpayers can use the following formula to calculate their capital gains taxes:
- Take your sale price
- Deduct selling expenses
- Write down your purchase price
- Calculate your basis: Deduct your purchase price from the sale price
- Calculate deductible depreciation
- When you deduct depreciation from the basis, you’ll get your gains
- Once you have your gains, multiply that by the California income tax rate.
How to Legally Reduce Your California Capital Gains Tax
The Californian tax code may not offer much leeway regarding capital gains depending on how long they’re held, but it’s not devoid of tax exclusions.
You may be eligible for the capital gains real estate tax exemption from the sale of residential real estate that’s used as a primary residence.
Taking advantage of the real estate tax exemption, a single taxpayer can save up to US$250,000, while married couples or registered domestic partners can save up to US$500,000.
To qualify, you must fulfil the following eligibility criteria:
- You must have lived in the home for two of the five years before the sale
- The profit from the house sale must net less than US$250,000
- You must not have claimed the exclusion in the past two years.
According to the Franchise Tax Board of California, the exclusion applies to a house, houseboat, condominium, mobile home, trailer or co-op apartment.
In particular cases, like the following, you may be eligible for a partial exemption if you could not live in the house for two years because:
- You had a medical condition
- There was a death in the family
- You needed to move because of your employment.
Moreover, you don’t pay capital gains taxes in California if you sell your home at a loss.
Capital Gains Tax California, 2024: FAQs
Yes, California levies capital gains tax at progressive rates, similar to the state income tax brackets and rates.
There are nine tax brackets ranging from 1% on income up to US$8,932 (US$17,864 for married joint filler) to 12.3% on income exceeding US$599,013 (jointly US$1,198,025).
There are nine states that levy no state capital gains tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. However, Federal capital gains tax still applies.
Yes, you can qualify for a tax exemption of up to US$250,000 (as a single filer) or up to US$500,000 (as a married couple) on real estate capital gains if you fulfil certain conditions.
You do not have to report the sale if your gain was less than US$250,000; you have not used the exclusion in the past two years; you owned and lived in the house for two years.
California is generally considered to be a high–tax state with income tax and capital gains rates ranging from 1% to 13.3% as well as sales taxes that can be as high as 10.25% in some municipalities.
Long-term capital gains tax in California is taxed as ordinary income, with rates ranging from 1%
to 13.3%. The specific rate depends on your taxable income.
California’s income tax brackets range from 1% to 12.3%, with an extra 1% mental health tax for
incomes over $1 million. Your California income tax bracket depends on your income level and
filing status.
Capital gains from real estate in California are taxed as regular income, with rates ranging from
1% to 13.3% based on your total income.
How to Pay Lower Taxes as a US Citizen
Despite the US’s worldwide tax regime extending to every corner of the globe, there are still ways to legally reduce your taxes as a US citizen.
If you’re looking for lower-tax options, you can use exclusions to curb the amount of federal income tax you pay and take advantage of strategies to limit or remove your exposure to state taxes.
Ultimately, however, you can run from the Internal Revenue Service (IRS) but you can’t hide. That’s why, as a means of lowering your taxes permanently, renouncing your US citizenship is an increasingly popular choice.
You can also remain a US citizen and choose tax–efficient overseas living, business incorporation and asset protection through a second residence or citizenship.
Whatever you decide to do, it must be planned and structured properly.
We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our uniquely successful methods. That will allow you to keep more of your own money, create new wealth faster and be protected from whatever happens in just three steps.
At Nomad Capitalist, we have a worldwide network of lawyers, estate agents, accountants and tax and company formation specialists. All that expertise and real-world experience come together when we advise on your holistic, bespoke action plan. Discover how we do things here.
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