Californians Deserve a Break on the State Home Sale Tax

It makes eminent sense for California--particularly California--to follow the federal lead in limiting the capital gains tax on the sale of a home. The Legislature and Gov. Pete Wilson should quickly enact the proposal of Senate President Pro Tem Bill Lockyer (D-Hayward) after its introduction next week.

California homeowners now can defer taxation on a home sale by investing in a new principal residence of equal or greater value within two years; at age 55, the homeowner is eligible for a one-time exemption on the first $125,000 of the cumulative profit on all home sales up to that point--provisions that were parallel with the old federal tax code. Amounts exceeding $125,000 are taxed as personal income.

This has been a cumbersome and inequitable situation, especially for retired couples or surviving spouses with no children in the home. They often want to sell the big old homestead and buy a condo or smaller house.

To do so, however, would trigger a sizable tax bite. Many have been deterred by that threat. And, because of the astronomical increase in housing values in California during the 1970s and 1980s, the gain for many living in relatively modest homes far exceeds the $125,000 exemption.

Lockyer’s measure, following new federal law, would eliminate the rollover and subject each house sale to potential taxation. But a single person could exempt the first $250,000 of profit and a couple, $500,000. Most middle-income families would never be taxed on a home sale. The impact on the state treasury would be small, a loss of about $25 million a year.

The measure would conform state tax law with the federal law on home sales for this year only. Lockyer said he would seek to make the change permanent as part of a broader effort next year to bring California tax law closer to federal statute.

Lockyer is amending the provision into a pending bill of his that would also bring taxes on certain types of businesses closer to current federal law.

In recent years it has become considerably more difficult to fill out state tax forms because they are increasingly at odds with federal returns. Ideally, Californians should be able to just figure a percentage of their federal bill and mail it to Sacramento. That may be too much to ask for now, but it’s a worthy goal to pursue.