Selling a house in California

Factual Questions
1

I realize that the Internet isn’t the greatest place to ask about tax advice, but…

We own a house in California (well, the bank owns it and we pay monthly morgage). We’re talking about selling, and our roommate says that we get a hefty tax if we haven’t owned the house for two years before we sell it again.

Now, I know that buying a house and selling it again within a year isn’t the brightest idea. However, are there taxes specifically to California relating to this? And are they absolute (for example, if I get transferred to another state or find a new job and we’re forced to sell, do we get hit with this tax)? Any sites or cites would be welcome.

2

I think he might be referring to a capital gains tax (federal tax) if you sell and don’t buy a new home within two years.

3

Does sound like capital gains tax. You do have to live in the house two of the last five years, as well as purchase a home of equal or higher value to avoid this tax.

However–and I’m going on memory here–I seem to recall our tax person saying this is no longer necessarily the case (regarding buying a more expensive home). IIRC, you are allowed up to $250,000 each (or $500,000 for a married couple) in tax-free capital gains in a home purchase/sale transaction. I do not believe these are California-specific laws.

Speak to a tax professional (or perhaps one will pop up in here?) for advice specific to your situation.

4

The second half of this is incorrect. To quote the Motley Fool’s website:

“The key to the entire plan is that you are allowed to sell a principal residence once every two years and exclude up to $250,000 ($500,000 for a married couple) of the gain on the sale”

The article may be found at:

http://www.fool.com/taxes/2000/taxes000428.htm

The article linked above does a good job of dispelling some of the misunderstandings about the capital gains tax on sale of a primary residence. This is a federal tax issue, not a California specific one. I don’t remember if it is pro rated (if, after living in the house for one year, you get a $125,000 capital gains exclusion) but the article may tell you.

5

It used to be the case that you had to buy a house of higher value, not any more. I don’t know of any taxes specific to California - I’ve been here 7 years, and I’m sure I’d have seen someone complaining about it by now if there was. But I’ve never sold a house here, so I’m not positive.

6

Wow. This has helped a lot. Thanks.

7

For the most part, California follows federal law, so I would presume they follow the two year rule on living in a home before sale.