Thinking about selling your Encinitas home and wondering how much of your profit you actually keep? You are not alone. Between federal rules, California taxes, and local transfer costs, it can feel complex. This guide breaks down the essentials in clear steps so you can plan with confidence and keep more of your hard-earned equity. Let’s dive in.
What is your capital gain?
Your capital gain is your sale proceeds minus your adjusted basis. Adjusted basis starts with what you paid for the home, plus qualifying capital improvements, and minus any depreciation you claimed. The IRS offers worksheets that make this easier in Publication 523. You can review definitions and examples in IRS Publication 523, Selling Your Home.
The home sale exclusion
Most homeowners rely on the federal Section 121 exclusion. If you owned and lived in your home for at least 2 of the 5 years before the sale, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly. The ownership and use tests can be met during different periods within that 5 year window. Get the full overview in IRS Topic No. 701, Sale of Your Home and the worksheets in Publication 523.
When gain is taxable
If your gain exceeds the exclusion, or you do not qualify, the excess is taxable. Long term gains are generally taxed at preferential federal rates, while short term gains are taxed at ordinary income rates. High earners may also owe the 3.8 percent Net Investment Income Tax (NIIT) on the portion of gain that is not excluded. See IRS Topic No. 559 for NIIT rules and thresholds.
Rental or business use affects taxes
If you used part of your home for rental or business and claimed depreciation, that portion of gain cannot be excluded. The amount tied to depreciation is taxed as “unrecaptured Section 1250 gain” at a federal maximum rate of 25 percent. You will find the reporting rules and examples in IRS Publication 544 and the worksheets in Publication 523.
California tax treatment
California generally follows the federal home sale exclusion, so many sellers pay no state income tax when their gain is fully excluded. If you have taxable gain, California treats it as ordinary income rather than using separate capital gains rates. For details, see the Franchise Tax Board’s guide on income from the sale of your home.
Property taxes are different from income taxes. Proposition 13 and Proposition 19 affect assessed values and certain base-year transfers, which are separate from capital gains rules. For local context, review the City of Encinitas information on property tax and Prop 19.
Encinitas transfer taxes at closing
In Encinitas, you will see a documentary transfer tax on your closing statement. The city imposes 27.5 cents per $500 of the sale price per its ordinance. You can confirm the city rate in the Encinitas municipal code.
San Diego County also collects documentary transfer tax at recording. Escrow and title calculate the total city plus county amount and note who pays based on your purchase agreement. Local practice often has the seller cover most transfer tax charges, but this can be negotiated. For county recording and collection practices, see the San Diego County Recorder.
Situations to watch
- Short holding period: If you sell within one year, any gain is short term and taxed at ordinary federal rates. See IRS Topic No. 701.
- Mixed use homes: Depreciation from rental or business use is always taxable. Learn more in Publication 544.
- Foreign sellers: FIRPTA generally requires the buyer to withhold 15 percent of the amount realized unless an exception applies. Review FIRPTA steps in the IRS FIRPTA overview.
- Inherited property: Basis rules differ and can reduce or eliminate gain. See the inheritance discussion in Publication 523.
- Investment property: A 1031 exchange can defer taxes for qualifying investment or business real estate, not a primary residence. Start with the IRS guide to like kind exchanges.
Your prep checklist
- Pull your records: purchase documents, closing statement, and receipts for capital improvements. The worksheets in Publication 523 help you calculate basis.
- If you rented or used a home office: gather depreciation schedules and rental records. See Publication 544.
- Confirm closing costs early: ask escrow for an itemized estimate, including the Encinitas city documentary transfer tax. You can reference the city ordinance and the county recorder.
- Consider your tax picture: if you expect taxable gain or NIIT, speak with your CPA before closing to plan timing and payments. Review NIIT in IRS Topic No. 559 and state treatment at the FTB site.
Ready to plan your sale?
When you understand the tax rules and local costs, you can price smart, time your sale well, and maximize what you keep. If you want help preparing, staging, and navigating escrow details while you coordinate with your CPA, reach out. With boutique attention and proven local strategy, Karen Morton will guide you through a smooth Encinitas sale.
FAQs
Do I owe capital gains tax when selling my Encinitas home?
- If you meet the federal 2 in 5 year ownership and use tests, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly, per IRS Topic No. 701 and Publication 523.
How does California tax a home sale gain?
- California generally conforms to the federal exclusion, then taxes any remaining gain as ordinary income, per the Franchise Tax Board.
What if I used my home as a rental or for a home office?
- Depreciation you claimed is not excludable and is taxed up to a 25 percent federal maximum as unrecaptured Section 1250 gain, per Publication 544.
Are there local transfer taxes in Encinitas?
- Yes, the city charges 27.5 cents per $500 of sale price and the county collects documentary transfer tax at recording, per the Encinitas municipal code and the San Diego County Recorder.
What should foreign sellers know about withholding?
- FIRPTA generally requires the buyer to withhold 15 percent of the amount realized unless an exception or reduced withholding applies, per the IRS FIRPTA guidance.
