In regard to the sale of a residence in California:
I think I know about the Federal income tax situation, where the
husband and wife each have $250,000.00 (for a total of $500,000.00)
tax exclusion on the profit from the sale of a residence, providing
they have lived there for at least 2 years of the last 5 years.

Example:
Sale of residence has net proceeds of $700,000.00 from escrow.
The owner’s basis in the residence is $200,000.00.
I believe with this situation, there is no Federal income tax to pay,
if the married sellers lived there for at least 2 of the last 5 years.

My question is:
How does the State of California tax this same situation?
Does California follow the Federal taxation in any way?

Hi Clicker,

Nice to hear from you again!

As a regular customer, you're undoubtedly aware that Google Answers
provides general information and is not a substitute for professional
legal or tax advice. The information below is believed to be accurate,
but no warranties are expressed or implied.
---------------


Yes, California has adopted the same exclusion.


"Capital Gains on the Sale of a Principal Residence...
For sales and exchanges of residences occurring after May 6, 1997,
California law allows the taxpayer to exclude from gross income the
gain realized on the sale or exchange up to a maximum amount. The
exclusion is allowed if the taxpayer used the residence as a principal
residence for two of the previous five years. The subsequent purchase
of another residence is not required. The exclusion for a given sale
is limited to $250,000 for single income tax filers and $500,000 for
married taxpayers filing jointly. Exclusions can be claimed for
additional sales or exchanges providing the above conditions are met.
California law waives a portion of the two-year occupancy rule for
Peace Corp volunteers. Additionally, it does not conform to federal
transitional provisions which allow certain taxpayers to elect prior
tax treatment for certain sales."
source: California Legislative Analyst's Office, February 1999, cached
by Google:
http://216.239.41.104/search?q=cache:uz5BMi9H0DEJ:www.lao.ca.gov/tax_expenditure_299/tep_299_incometax1.html&hl=en&ie=UTF-8&client=googlet

The federal income tax rule that you mention is codified as Section
121 of the Internal Revenue Code.  See:
Section 121. Exclusion of gain from sale of principal residence
http://caselaw.lp.findlaw.com/casecode/uscodes/26/subtitles/a/chapters/1/subchapters/b/parts/iii/sections/section_121.html


Section 17131 of the California Revenue & Taxation Code adopts the
same gross income exclusions as the federal tax code.  Section 17152
of the California Revenue & Taxation Code specifically adopts Internal
Revenue Code (IRC) Section 121, with some minor modifications (e.g.,
California has special rules for homeowners serving in the Peace
Corps; and there are special California rules relating to provisions
of IRC 121 that allow taxpayers to elect to NOT to take the
exclusions).
See:
CA Revenue & Taxation Code - Section 17131
CA Revenue & Taxation Code - Section 17152
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=17001-18000&file=17131-17157


Basically, though, the California law is the same as the federal law.

Keep in mind, though, that California taxes capital gains at the same
rate as ordinary income.  So if you gain MORE than $500,000 on the
sale of your home, the excess amount will be taxed at your regular
California rate (unlike the federal law which taxes capital gains at a
lower rate).
Source:
"California does not conform to the federal reduced capital gains tax
rates. California taxes capital gains at the same tax rate as other
types of income."
- California 540 instructions
http://www.ftb.ca.gov/forms/02_forms/02_540ca_inst.pdf


I don't know if you've been taking home office deductions, but note
that the IRS recently adopted some taxpayer-friendly rules relating to
gain on sale of residences that were also used as home offices. An
interesting article from a law firm in Sacramento points out that the
new IRS regulations also apply to California:
McDononough Holland & Allen: Business Tax Law Newsletter March 2003
http://www.mhalaw.com/web/news/bulletins/BusLaw_Mar2003.pdf
Relating to:
IRS - Treasury Decision 9030 [Final Regulations]
http://www.irs.gov/pub/irs-regs/td9030.pdf

[ Note that several of the documents that I've mentioned are in PDF
format, so the Adobe Acrobat Reader is required. If you don't have
that, please visit Adobe's web site:
http://www.adobe.com/products/acrobat/readstep2.html  ]    
  

I hope this helps.  If anything is unclear, please use the "requestion
clarification" feature.  Thanks and have a nice weekend.

---

Clarification of Answer by juggler-ga on 16 Aug 2003 00:51 PDT

Oops, I left out a search strategy...

search terms:
irc, exclusion, gain, residence
irc 121, california
california, 17152, residence

Hello again juggler:
Thank you for your knowledge, and the fine research you seem to do so well.
Kindest regards,
clicker5