The Capital Gains tax California imposes is not going to drop any time soon. This tax is a tax on the profit you made when you sold an asset for more than what it cost. The two most common forms of capital gains that people talk about are: stocks and real estate. If you did not hold that stock or piece of property for at least one year before selling then your sale would be subject to the Short Term Capital Gains Tax California which is just your normal income tax rate (keep in mind this will also apply to unearned income such as interest and dividends). If, however, you held onto this asset long enough so that it qualifies as a Long Term Capital Gain California then congratulations! Your percentage tax is going to drop tremendously due to Proposition 13’s recent passing.
The beauty of the 1031 Exchange, which is the technical term for “a tax free exchange of business or investment property run through the IRS”, is that it allows you to defer paying your capital gains taxes on an asset if you sell it (or buy more like kind property) for one of two reasons: 1) You are reinvesting in a business or in a new construction project, 2) You are exchanging it for a piece of property outside of California.
A 1031 Exchange has been used in many ways over the years and by many different people. The most common being someone investing in real estate where they purchase a piece of commercial real estate out-of-state then hold onto that until they either die, utilize their IRA or off part of their stock portfolio.
California Capital Gains Tax Benefits
This is a very complex tax that holds some benefits for those who know how to play the game. For a better understanding of how a 1031 exchange can help you defer your Capital Gains Tax in California, please see more about 1031 exchange rules in California.
They Do Not Get a Free Ride: The new person buying a property in a 1031 Exchange still gets taxed on any capital gains from the sale of their old property, so it is not like they get off scot-free. Also, if part of the holding period for the new property was used to gain Long Term status for any properties sold in between, then this would also be taxable when using an exchange.
The dollar limit is $250,000/$500,000 (if filing jointly) or $500,000 (if filing separately). Funds in a revocable living trust (RLT) that is considered the grantor’s property and for which he/she can revoke at any time are not counted; however, funds placed in an irrevocable RLT are.
The IRS also has several exemptions to this rule:
1. Property located outside of California or U.S.,
2. Property held for sale to customers such as inventory or stock-in-trade,
3. Stock in certain foreign corporations unless it is readily tradeable on an established market,
4. The home you live in – if the 1031 Exchange was initiated due to: change of job location, health reasons or because you were relocated by your present employer, or
5. If the capital gain from the sale of your home is excluded from income because it represents a refund of retirement savings contributions using IRS Form 8815.
The State of California does not control the 1031 Exchange so you could exchange out-of-state properties as long as they meet the following requirements:
1. You must hold onto each property for at least one year before selling or exchanging it, and
2. Your intent to use a 1031 Exchange must be indicated on your tax return via attached documentation showing that both properties were held as “investments”.
You can also make two exchanges as long as you do not violate any rules such as those listed above. In this case, you would have to sell the property that was originally sold.
The 1031 exchange allows you to defer paying taxes on your capital gains if you are buying or selling investment properties. Get in touch with our 1031 Exchange Fund Professional for faster options that are highly liquid and have great return on investment.
There are other steps that need to be taken before you understand all the details about California Capital Gains Tax, which is why it’s important to contact an accountant or tax professional in order to understand how they work and what all of this entails.
This article provides only general information about how Capital Gains Tax in California works. It is not exhaustive nor should it be considered advice on any particular matter. The author explicitly disclaims liability for damages incurred by relying on these contents or related materials from third parties. Always seek the help of a qualified legal, accounting, real estate professional and/or such related professionals when dealing with specific legal or financial issues.