Legal Question in Real Estate Law in California

Re: Capital Gains if take no distribution on profit?

With a minor exception, California law follows Federal law on exemption of sale of a principal residence from capital gains taxation. The difference is that the California basis might, is some instances, differ from the Federal basis.

Tax-deferred exchanges provide a short time-window opportunity for investors in income property to sell and later reinvest the proceeds without an immediate taxable gain being registered, but these deals work only for investment or income type property and have strict rules as to how the proceeds of sale are "parked" pending reinvestment, and when it is done. You would need advance advice from an expert to do one of these 1031 or "Starker" exchanges.

There can be a withholding tax on sales of California real property. Ask your broker or escrow holder about this.

Sale of principal residence rules give the occupant/seller an automatic exemption of $250,000 of gain ($500K for a married couple filing jointly) if you have lived there two of the last five years. Remember, it is the gain that is taxed (net selling price less cost basis) and to which the exemption applies, not the selling price itself.

Many years ago, the exemption law worked differently: if you bought a replacement home for the same or more, you had no taxable gain. I believe the $250K/$500K blanket exemption replaced the timely reinvestment rule for principal residences.

Re: Capital Gains if take no distribution on profit?

You have a federal exemption of $250000 per resident from capital gains tax. I don't know if the State follows the Federal law in this respect. If not, it will allow you to avoid the capital gain on any portion (pro rata) that is reinvested in a residence so long as it is reinvested within some time period, probably 12 - 18 months. There is no need to sequester the funds.

The technique you are asking about is used to avoid gain in a 1031 exchange of investment real estate.