How to Avoid Capital Gains Tax in California
Capital gains tax can seriously dent your earnings if you sell something of high value, such as a house or stocks. In California, this tax definitely hurts more because the state not only charges you at higher rates, but also on top of the federal rates. Think of it like this, you sell your house and make a good profit, however, taxes take away a large part of it. It’s really annoying. However, there is still a chance. With proper planning, you may be able to get this tax off your back or at least reduce it legally.
What is Capital Gains Tax?
Capital gains tax is the amount paid on the profit made from selling things like stocks, property, or even some collectibles. It is the difference between what you bought something for and what you sold it for. This profit is called a “capital gain,” and you have to report it to the IRS and California’s tax authorities whether you are selling a home, investment property, or shares of stock.
"Capital gain is the profit when you sell assets like stocks or real estate for more than you paid.” – CEO, MYI Digital.
How Much Capital Gains Tax in California?
In California, your capital gains tax is actually the same as your income tax. California has no special rate for capital gains, so you pay the same as you would on any other earnings. The rates range from 1% to 13.3%. The top rate applies to people with over $2 million in taxable income. This is higher than most states and makes planning important.
Federal vs California Capital Gains Tax Rates
Federal Long-Term Capital Gains Tax Rates (2025)
Short-term gains (assets held less than 1 year) are taxed at your full income tax bracket up to 37% federally.
California State Capital Gains Tax Rates (2025)
California taxes all capital gains as income. Here are the 2025 brackets:
High earners can pay over 38% combined capital gains when including all federal, state, and special taxes.
Understanding Capital Gains in California
There is no difference between long-term and short-term state taxes because all gains are income.
Federal law gives lower rates for long-term gains, but state law does not.
Your “basis” (the original price you paid, plus improvements and fees) hurts or helps your final profit.
All capital gains in California are reported on your state's return and potentially push you into a higher bracket.
How Do You Calculate Capital Gains Tax?
Here is a step-by-step process how to calculate capital gain tax:
Step-by-Step
Find your “basis” (what you paid plus costs like repairs or fees).
Subtract your basis from your final selling price.
Your profit is the “capital gain.”
Check both your federal and California tax brackets to see how much is owed.
You can use an online capital gains tax calculator for California for an estimate.
Legally Avoiding or Reducing Capital Gains Tax in California
You want legal ways to keep more of your hard-earned money? Here are the best options for 2025.
Using Tax-Advantaged Accounts
Place investments inside retirement accounts, like IRAs and 401(k)s. Gains here are not taxed until you take the money out or may even be tax-free in Roth accounts.
This lowers your taxable income for the year, which also helps lower your capital gains tax.
These accounts are a strong tool for capital gains tax planning in California.
Primary Residence Exclusion (Capital Gains Tax Exemption California)
If you sell your main home, you may be able to exclude up to $500,000 as a married couple ($250,000 single) from your capital gains if you lived there for two out of the last five years.
1031 Exchange: Deferring Taxes on Real Estate
Selling an investment property? Use a 1031 exchange to buy another one. If you reinvest the gain in a “like-kind” property, you can defer (delay) paying capital gains tax until you finally sell without exchanging again.
Key Rules for 1031 Exchanges in California:
Have 45 days from sale to identify your new property and 180 days from closing.
Both old and new properties must be for investment or business.
No cash out; only "like-kind" swaps qualify.
Investing in Qualified Opportunity Zones California
Put profits into “Qualified Opportunity Funds” that invest in certain low-income neighborhoods (there are 879 zones in California). Hold for five or ten years and profits may be eligible for reductions or even no capital gains tax on new gains.
Tax-Loss Harvesting
Sell losing investments to offset gains. The IRS allows netting losses against your profits for both state and federal taxes. This is a classic move for proper capital gains tax planning in California.
Charitable Gifting and Step-Up Basis
Give appreciated assets to charity. You may avoid capital gains tax entirely and get a deduction.
Leave property to heirs: The value resets (“step-up basis”) and lowers or erases future capital gains if sold.
Inheritance and Stepped-Up Basis
Heirs get a new basis, set at market value on the date of your death. This avoids capital gains on past appreciation.
Other California Capital Gains Tax Loopholes (What’s Legal?)
Some claim special “capital gains tax loopholes” exist in California. Here are options that actually work and are allowed under IRS and California law:
Moving out of state before selling does not help if the asset is California-based.
Gifting to family usually does not eliminate tax, unless combined with gifting to charity or on a step-up basis.
Primary residence and 1031 exchanges are the main tested, legal ways to reduce California capital gains tax exposure.
If you need help, reach out to LienLift for effective guidance on complex property tax and title issues.
Capital Gains Tax for California Real Estate
Selling California real estate? Here’s how capital gains tax applies:
If it’s your main home, use the exclusion if you can.
If it’s investment property, look at 1031 exchange or Opportunity Zone investment.
Improving your basis (recording and tracking costs like upgrades) will save tax.
California property tax exclusions do NOT reduce capital gains tax unless tied to the home sale exclusion.
For real estate capital gains tax strategies, consider all state and federal moves together for the best outcome.
Capital Gains Tax Planning Strategies for 2025 and Beyond
Best Practices
Use a capital gains tax calculator to model your tax bill before selling.
Spread large gains over many years to avoid higher tax brackets when possible.
Make use of retirement plans, Opportunity Zones, and 1031 exchanges to defer taxes.
Be smart about investment losses. They can help offset gains and trim your bill.
California has 879 Opportunity Zones, more than 10% of the national total, offering loads of real-world options for tax deferral while boosting communities.
LienLift helps Californians with simple solutions to big tax and lien problems.
Final Words
Plan early and keep careful records. The only way to reduce capital gains tax in California is to work the rules in your favor. Each choice has big effects on your final tax bill, so research, consult experts, or contact LienLift to ensure you make the most smart moves.
Frequently Asked Questions
When do I pay capital gains tax in California?
You report and pay the tax in the same year you sell your asset on both your federal and state taxes.
Can I combine multiple tax deferral strategies?
Yes. For example, you can use both a 1031 exchange and an Opportunity Zone investment for maximum effect, but each has its own rules.
What if my gain is from an inherited property?
You usually benefit from a “stepped-up basis,” which can greatly lower or erase capital gains tax if you sell quickly.
How do I use tax-advantaged accounts to help?
Put investments in an IRA or 401(k). Gains inside these accounts are tax-free until withdrawal. With a Roth IRA, gains may be tax-free forever.
What is tax-loss harvesting?
It means selling losing assets to offset taxable gains, lowering the total tax bill.
