Understanding State Tax On Capital Gains

Q: We are retired. We’ve decided that we want to sell our home in California and move to Idaho.
 

We have approximately $350,000 equity in our home.

I was told we had to close on the house we are buying in Idaho first, then close on the house in California to avoid paying state taxes. Is this correct?

A: Assuming that that you haven’t eaten up a huge chuck of equity over the years, you most likely don’t owe any capital gains tax on your federal return. According to the Franchise Tax Board, which collects Tax for the State of California, you probably also don't owe any state tax on your capital gains.

California follows the IRS tax rules which permit sellers of a primary residence to keep up to $250,000 in profits tax free (up to $500,000 if you're married).

In your letter you write that you will have $350,000 in equity when you sell. Even if all of that is true profit (that is, the sales price minus the price you paid plus the costs of purchase and sale plus the costs of any structural improvements you made to the home), it's still less than the $500,000 you're able to keep tax-free from the sale.

Whoever you discussed this tax topic with you may mistakenly believe the old "rollover replacement" rule still applies. That tax rule said you could defer taxes by rolling over the sale proceeds into a new property. They might have also thought that you had to change your residency to Idaho to avoid paying taxes in California.

The "rollover replacement" rule was thrown out and replaced by newer tax laws. For more details, go to the California Franchise Tax Board's website (www.ftb.ca.gov). You may also wish to visit the IRS's website (www.irs.gov) to pull up a copy of IRS Publication 523 "Selling Your Home."

Finally, be sure to talk with your attorney or tax advisor to make sure other rules, regulations and laws don't apply in your situation, and to make sure that there isn’t something specific to your situation that would require you to buy the other home first.

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