When purchasing a home in California, key tax considerations include deducting mortgage interest, property taxes, and potential capital gains exclusions. Itemize deductions on Form 1040 by filing Schedule CA (540 or 100) to claim state-specific deductions. For federal taxes, mortgage interest on loans up to $750,000 (post-2017) is deductible, while California allows deductions for interest on loans up to $1 million if originated before December 15, 2017. Property taxes in California average 0.63% of assessed value, exceeding the federal $10,000 cap, so itemizing is essential. When selling, federal law permits excluding up to $250,000 ($500,000 joint) in capital gains if owned and lived in the home for two of five years, but California does not conform to this exclusion, requiring state tax payments on gains.

California’s property tax system, managed by county assessors, assesses homes at 80% of purchase price or market value, whichever is lower. In 2022, the median annual property tax in California was $3,680, per the State Board of Equalization, exceeding the federal deduction limit. For mortgage interest, the IRS allows deductions for interest on loans up to $750,000 (or $1 million for pre-2018 loans), but California’s Franchise Tax Board caps deductions at $3 million for loans originated before 2018. Homeowners must itemize to benefit, as the standard deduction ($13,850 single, $27,700 joint in 2023) often outweighs these benefits.

Capital gains exclusions at the federal level do not apply in California. In 2022, California collected $8.6 billion in capital gains taxes, reflecting the state’s 13.3% tax rate on such income. Selling a primary residence may trigger a $600,000 state tax liability on excluded federal gains, as the exclusion is federal-only. Additionally, California offers a Home buyer tax credit of up to $20,000 for first-time buyers purchasing energy-efficient homes, though this expired in 2021 and may not apply currently.

Documentation is critical: retain closing documents, Form 1098 (mortgage interest), property tax receipts, and proof of home improvements. For federal filings, Schedule D details capital gains, while California’s Schedule CA-1 reports property taxes. consulting a tax professional is advisable due to complex state rules and federal conformity nuances. In 2023, 65% of California homeowners itemized deductions, per the Franchise Tax Board, highlighting the importance of strategic tax planning.