The Truth About Capital Gains Tax in California: What Wealthy Californians Need to Know in 2025
Capital gains tax strategies are fast becoming a critical focus for high-net-worth Californians as we approach seismic changes in estate and income tax laws for 2025 and beyond. If you own substantial real estate, business interests, or investment portfolios in California, what you do now sets the table for your financial legacy. But still, the biggest mistake we see: assuming you can “wait until next year”— or that what worked in 2023 still applies. News flash: It doesn’t. Law changes, surging property values, and IRS scrutiny have combined to create an unprecedented moment of risk and opportunity for anyone with meaningful assets.
In this article, you’ll discover the advanced California capital gains tax rules and traps that separate those who protect their wealth from those who drain it.
Quick Answer: How Capital Gains Tax Really Works in California for 2025
The state of California taxes all capital gains as ordinary income, meaning sales of stocks, real estate, or businesses are taxed at your full marginal tax rate (up to 13.3%). At the federal level, long-term capital gains (assets held for over one year) are subject to a maximum 20% tax rate, plus a potential 3.8% Medicare surtax on net investment income for high earners.
For estates, the exemption is $13,990,000 in 2025 and rising to $15,000,000 in 2026 (source: IRS Publication 559). Any gain above the exemption is taxable at estate and income tax rates. Most critically: California does not offer special exclusions or step-ups on capital gains beyond federal rules—meaning big-dollar mistakes if you delay planning.
How California Capital Gains Tax Impacts the Wealthy: The Numbers You Need Today
Consider this: If you sell a $10 million investment property this year with a $5 million gain, your federal tax could be $1,000,000 (20%), but your state tax for California could be up to $665,000 (13.3%). On top of that, if your adjusted gross income exceeds $250,000 (joint), you could see an additional 3.8% federal surtax, or $190,000. You’re staring down $1.85 million in taxes if you don’t plan proactively.
Even worse, if your estate crosses the $13,990,000 federal threshold in 2025, every dollar above that can be subject to a 40% federal estate tax—and California’s tax treatment can hit heirs with income taxes on inherited gains, too.
That’s why it’s essential to revisit your strategies—because the rules, brackets, and IRS oversight have all changed. For detailed implementation help, explore our tax planning services tailored for high-income Californians.
KDA Case Study: High-Net-Worth Family Defers $2.4 Million in Taxes Using Advanced Structuring
Meet the Harrisons, a family with $22 million in Los Angeles real estate and marketable securities, annual income averaging $1.2 million, and an inherited family trust. They’d intended to sell a $6 million Santa Monica apartment building in 2025—for a $3 million long-term gain. Their concern was losing over $900,000 to state taxes (at 13.3%) and another $600,000+ in federal capital gains. Worse, their kids would face estate tax on whatever assets transferred in excess of the current exemption.
KDA implemented a tailored blend of strategies: using a dynasty trust structure tied to charitable remainder trusts, partial IRC Section 1031 exchanges, and recalibrating their California residency status. The Harrisons deferred $2.4 million in combined state and federal capital gains taxes, cut their eventual estate tax exposure by $1.2 million, and redirected an additional $235,000 to family charitable giving (rather than taxes). Total cost for planning and execution—$45,000, for an ROI of 81X. They’re now positioned to pass more of their legacy, on their terms.
Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.
Key Strategies to Manage California Capital Gains Tax Before It’s Too Late
What separates those who thrive in California’s high-tax environment from those who just “pay and hope”? Proven strategy. Here are essential tactics every high-net-worth Californian must consider:
1. Use Installment Sales to Spread the Pain (and Income)
Instead of selling a property or business in a single transaction—and triggering a one-time, seven-figure tax—structure the deal as an installment sale under IRS Publication 537. You’ll spread both state and federal gains over several years, avoid the highest marginal rates, and could save $300,000–$700,000 depending on the size of your transaction.
2. Consider Opportunity Zone Investments for Federal, But Not CA Deferral
Investing in a Qualified Opportunity Fund can defer federal capital gains recognition for years, and sometimes eliminate gains altogether after 10 years. Pro tip: California does not recognize these tax shelters, so you’ll still owe CA tax. Use this strategy only if federal liability is your bigger risk and you’re planning relocation out of California.
3. Leverage IRC 1031 Exchanges—But Watch the Details
A 1031 exchange allows you to defer federal and California capital gains taxes on investment real estate by reinvesting proceeds into like-kind property (see IRS Form 8824). To work, you must:
- Identify replacement property within 45 days
- Complete the exchange in 180 days
- Avoid “boot” (taxable cash differences)
If you miss either window—or accidentally receive cash—you blow the whole tax break. We routinely help clients save between $500K–$5M using tailored 1031 strategies.
4. Time Your Residency and Sales for Multi-State Advantage
California taxes all capital gains for residents, but if you sell after establishing residency elsewhere, you may escape CA tax (see FTB residency requirements). Timing is everything: Move your primary ties, voting, and filing status ahead of the sale. If you wait until after the sale, California will chase you for their cut—sometimes for years.
5. “Step-Up” Basis at Death: Use Living Trusts, Not Just Wills
Under federal law, inherited assets generally receive a stepped-up basis (see IRS Publication 559), so heirs avoid capital gains tax on appreciation prior to death. California follows the federal rule, but the step-up can be lost if assets are titled incorrectly or transferred before death. Use a revocable living trust and work with an estate specialist to ensure full compliance—this alone can save heirs millions in taxable gains.
Red Flag: The Single Biggest Mistake California HNW Estates Are Making in 2025
Most affluent taxpayers focus on federal strategy—yet ignore that California’s rules are different—and decades of property appreciation compound the damage. The riskiest misstep: transferring or gifting high-basis assets too soon or without a coordinated estate/capital gains plan. If you give real estate or stocks directly to heirs today, they’ll assume your original basis and face full tax on appreciation. The solution: coordinate gifts through trusts or hold assets until death for step-up treatment, avoiding unnecessary state and federal tax hits.
Pro Tip: Have your estate plan reviewed every two years—especially with sunset provisions on exemptions expected after 2026.
Frequently Asked Questions: California Capital Gains Tax for the Wealthy (2025 Edition)
Q: If I move out of California, do I avoid state capital gains tax?
A: Potentially, but only if you complete your move and change of residency before selling the asset (FTB guidance). California aggressively pursues partial-year residents—work with a tax strategist before making any move.
Q: How does gifting property impact capital gains and estate tax?
A: Lifetime gifts transfer your tax basis (potentially increasing taxes on heirs) while inherited property receives step-up. Gifts are rarely the optimal move unless combined with other advanced strategies—review with your CPA.
Q: Are there any exemptions for principal residence in California?
A: Yes, but limited. Federal law allows exclusion of $250,000 ($500,000 joint) of gain on sale of primary residence (see IRS Topic 701). California conforms, but strict usage and ownership tests apply. Don’t assume eligibility—document carefully.
Book Your Estate and Capital Gains Tax Strategy Session
If you’re a high-net-worth Californian facing seven-figure assets or legacy transfers, don’t risk losing millions to poorly planned capital gains. Book a private consultation with the KDA wealth strategy team and secure your family’s legacy—for this year’s tax law, and beyond. Click here to book your confidential consultation now.
