Will Capital Gains Taxes Affect Your Home Sale? What San Diego Homeowners Need to Know

Selling your primary residence usually won't trigger capital gains tax thanks to federal tax exclusions. Under IRS Section 121 rules, individual homeowners can exclude up to $250,000 in home sale profits from taxable income, while married joint filers can shield up to $500,000. To qualify, you must have owned and occupied the property as your principal home for at least 24 months during the five years prior to closing. Capital gains tax only applies to profit amounts that exceed these limits, or if the property was used as a rental or investment.

Many San Diego homeowners have spent decades building equity in their homes. While that appreciation is generally a good thing, it can sometimes create an unexpected challenge when it's time to sell: capital gains taxes.

I was recently interviewed by The Epoch Times regarding a report estimating that approximately 13 million U.S. homeowners could face potential capital gains tax exposure when they sell their homes. While taxes should never be the sole factor driving a real estate decision, they are an important consideration that homeowners should understand before making a move.

For long-term San Diego homeowners, downsizers, retirees, and families navigating major life transitions, understanding how capital gains taxes work can help prevent surprises and allow for better planning.

And first let me qualify everything stated below by stating that you should always talk with your CPA, and that nothing written here should be construed as tax or legal advice. I'm a real estate agent - not an accountant or lawyer.

What Are Capital Gains Taxes?

A capital gain is generally the difference between what you paid for an asset and what you sell it for.

For homeowners, the calculation is not always as simple as purchase price versus sales price. Factors such as qualifying improvements, certain closing costs, and adjusted basis calculations can impact the final numbers.

The good news is that many homeowners qualify for a significant tax exclusion on the sale of their primary residence.

Current federal rules generally allow homeowners to exclude (and an effort is underway to actually increase this limit since it's outrageously outdated):

• Up to $250,000 in gains if filing as a single taxpayer
• Up to $500,000 in gains if married and filing jointly

To qualify, homeowners typically must have owned and lived in the property as their primary residence for at least two of the previous five years. Because tax situations vary, as stated before, homeowners should always consult with a qualified CPA or tax professional regarding their specific circumstances.

Why This Matters More in San Diego

San Diego has experienced significant home appreciation over the past several decades. Many homeowners who purchased their properties 15, 20, or even 30 years ago have seen values increase dramatically. While that appreciation has helped build wealth, it also means that many homeowners will exceed the federal exclusion thresholds when they eventually sell.

For example, a homeowner who purchased a property decades ago for a couple hundred thousand dollars likely now owns a home worth well over $1 million.

What does this mean for our housing inventory in San Diego? It means many long-term hold sellers of investment properties are deciding against selling in today's market because their costs to carry the property aren't that high. 

In some situations, however, homeowners discover that the financial benefits of selling outweigh the potential tax consequences. 

The most important thing is having accurate information before making a major decision.

Important Life Transitions Often Trigger These Questions

Many of the homeowners who ask about capital gains taxes are not simply trying to maximize profits.

They're navigating important life transitions.

Common examples include:

• Downsizing after children move out
• Relocating closer to family
• Retirement moves
• Selling an inherited property
• Trust and probate sales
• Moving from a larger home to a lower-maintenance lifestyle
• Purchasing a home better suited for aging in place

In these situations, taxes are only one piece of a much larger decision.

Why Planning Matters

One of the biggest mistakes homeowners make is waiting until their home is already on the market before evaluating the financial implications of a sale. I always advise my sellers to talk with their accountant before even deciding to list. Please don't put the cart before the horse - you don't want to learn about your tax burden when you are already under contract with a buyer. 

The first piece of info you will need, of course, is the estimated value of your home. Once we know that, then we can get an estimated settlement statement drafted for you by an escrow company. That will show you your estimated proceeds, and then you can take THAT number to your accountant. And then your accountant can talk to you about what capital gains you may be liable for upon selling the home. 

You can probably tell that my team and I put a big emphasis on education. At Kimberly Schmidt & Associates, we believe informed clients make better decisions, and those better decisions lead to happy clients. 

If you're considering a move and wondering how taxes, market conditions, and your overall financial picture may impact your decision, it's worth starting the conversation early. We help clients navigate important real estate decisions through data-driven strategy, concierge-level preparation, and an education-first approach so they can move forward with confidence. Always feel free to reach out. 

Oh - to read the article in the Epoch Times about how capital gains liabilities are affecting today's real estate market, and what I had to say on the subject, click this link.

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Disclaimer: Kimberly Schmidt & Associates does not provide tax or legal advice. Homeowners should consult with a qualified CPA, tax advisor, or attorney regarding their specific situation.