Short-Term vs. Long-Term Gains
For federal tax purposes, how long you hold an asset before selling determines the rate:
- Short-term gains (held 1 year or less) — taxed as ordinary income, up to 37% federal
- Long-term gains (held more than 1 year) — preferential rates of 0%, 15%, or 20% depending on income
California Does Not Distinguish
California taxes all capital gains — short-term and long-term — as ordinary income at state rates up to 13.3%. For high-income California taxpayers, the combined federal and state rate on long-term gains can approach 37%+.
Special Rule: Inherited Property
Property inherited at death receives a stepped-up basis and is automatically treated as long-term capital gains property for federal purposes — regardless of the heir's actual holding period. This is one of the most valuable tax benefits for heirs of appreciated property.
Primary Residence Exclusion
Taxpayers who sell their primary residence may exclude up to $250,000 ($500,000 for married couples filing jointly) of gain from federal and California income tax — if they meet the ownership and use tests.
Disclaimer: This glossary entry is for general educational purposes only and does not constitute legal or tax advice. Laws change frequently and vary by individual circumstances. Consult a licensed California attorney or CPA for guidance on your specific situation.