Capital Gains Tax When Seniors Sell Their Home in California: What You Need to Know

You bought your Fresno home in 1988 for $95,000. It's now worth $420,000. If you sell it, do you owe capital gains tax on the $325,000 gain? The answer depends on several factors — and getting it wrong can cost your family tens of thousands of dollars.

This article explains the key tax rules California seniors need to understand before selling their home. We are not tax advisors — consult a CPA for advice specific to your situation — but this will give you the framework to have an informed conversation.

The Federal Capital Gains Exclusion (Section 121)

The most important rule: if you have owned and lived in your home as your primary residence for at least 2 of the last 5 years, you can exclude up to $250,000 of capital gains from federal income tax (single filers) or $500,000 (married couples filing jointly). This exclusion is available once every two years.

In our example above — bought for $95,000, now worth $420,000, gain of $325,000 — a married couple would pay zero federal capital gains tax. A single filer would exclude $250,000 and owe tax on $75,000 of gain.

California does not have a separate exclusion, but the federal exclusion applies to your California return as well. California taxes capital gains as ordinary income, with rates up to 13.3% for high earners. For most seniors, the effective California rate on capital gains is 6–9%.

What Is Your "Basis"?

Your capital gain is the sale price minus your adjusted basis. Your basis starts with what you paid for the home, but it can be increased by the cost of capital improvements you made over the years — a new roof, an addition, a kitchen remodel, a new HVAC system. Keep records of major improvements, as they reduce your taxable gain.

Step-Up in Basis at Death

This is one of the most important — and least understood — rules in estate planning. When someone inherits property, their basis is "stepped up" to the fair market value of the property on the date of death. This means that if your parent bought a home for $80,000 in 1975 and it's worth $450,000 when they pass away, the heir's basis is $450,000 — not $80,000. If the heir sells the home immediately after inheriting it, they pay zero capital gains tax.

This is why it is often better, from a tax perspective, to inherit a home rather than receive it as a gift while the parent is alive. A gift does not get a step-up in basis — the recipient takes the donor's original basis.

California Proposition 19

Proposition 19, passed in November 2020, allows California homeowners 55 and older to transfer their property tax base to a new primary residence anywhere in California, up to three times. If you're downsizing from a home with a low assessed value (because you've owned it for decades), this can significantly reduce your property taxes on the new home. The new home must be of equal or lesser value, or you pay a partial adjustment.

When to Sell: Timing Matters

If your gain exceeds the exclusion amount, consider timing the sale in a year when your other income is lower — for example, after you've retired but before you start taking Social Security or required minimum distributions from retirement accounts. Lower income means a lower marginal rate on the capital gain.

Call us at (559) 281-8016 for a free cash offer. We always include a third-party broker opinion of value so you know exactly what your home is worth before you make any decisions.