Real Estate Law & Tax Rules in California
Real Estate law in California is confusing.
But, that doesn’t mean you can ignore the implications associated with California real estate law. Nor, however, can you ignore your obligations to “Uncle Sam.”
Understanding real estate law as well as your tax obligations is paramount to realizing a profit (or “gain”) when you sell your home.
Ten Commandments of Selling Real Estate in California
1. Basis: Your “basis” is what you paid for your real estate, plus the cost of any improvements you’ve made.
2. Gain: You’ve realized a “gain” (or profit) if you sell your home for more than you paid (basis).
3. Primary Residence Exclusion: You can exclude some or all of the gain from income when you sell your “primary residence.”
4. Home Sale Exclusion: Individuals can exclude up to $250,000 of gain earned on sale of their home. Married couples filing joint returns can exclude up to $500,000.
5. If You Can Exclude All Profit: If you’re able to exclude all of the profit (“gain”), then you don’t need to report it on your tax return.
6. If You Cannot Exclude All Profit: If you have profit that cannot be excluded (i.e. more than $250,000 for individuals and more than $500,000 for married couples filing joint returns), then you need to report the gain on Form 1040, Schedule D.
7. Loss on Personal Residence: A loss on the sale of your personal residence is not deductible.
8. Single Exclusion for Multiple Homes: If you have 2 or more homes, you can only exclude the gain on one of the homes. Your “primary residence” for real estate law and tax purposes is the home that you spent the most time in.
- In addition to your use of the home, other factors that are considered in determining your primary residence include: place of employment; where your family members reside; the address listed on your federal and state returns, driver’s license, automobile registration, and voter registration card; the mailing address you use for bills and correspondence; and the location of your banks, religious organizations, recreational clubs, and other such affiliations or associations.
9. Sale of Another Home w/in 2 Years: You are ineligible for full exclusion if you excluded the gain from the sale of another home during a 2 year period prior to the sale of your current home.
10. Excluding Large Gains: You may be able to exclude large gains (over $500,000) by converting your home to a rental and selling it thereafter under IRC 1031.
You should discuss your case with an attorney specializing in real estate law if you’ve inherited property as there are special rules to consider.