Capital Gains Tax When Selling Your California Home (2026)

Most Southern California homeowners selling their primary residence owe no capital gains tax — the IRC §121 exclusion eliminates the gain for most sellers. But understanding the rules matters, especially if you’ve owned the home for decades, rented it out, or inherited it.

I’m Selvin Herrera, a licensed California real estate agent in the Inland Empire. Here’s the honest tax picture for California home sellers in 2026.

---

The IRC §121 Primary Residence Exclusion

Under IRC §121, if you owned and used the home as your primary residence for at least 2 of the last 5 years, you can exclude:

• $250,000 in capital gains (single filers)
• $500,000 in capital gains (married filing jointly)

Example:

• You bought in 2015 for $350,000
• Selling in 2026 for $700,000
• Gain: $350,000
• Married filing jointly: exclusion of $500,000 — $0 taxable gain

The exclusion can be used once every 2 years. Partial exclusions apply if you move due to a change of employment, health, or unforeseen circumstances.

---

When Capital Gains Tax Does Apply

You’ll owe California and federal capital gains tax on any gain above the §121 exclusion — or on the full gain if the home doesn’t qualify.

Federal Capital Gains Rates (Long-Term, 2026)

Taxable Income (Married Filing Jointly)	Rate
Up to $94,050	0%
$94,051 – $583,750	15%
Over $583,750	20%

Long-term = property held more than 12 months. Short-term gains are taxed as ordinary income.

California Capital Gains Rate

California taxes capital gains as ordinary income — no preferential rate. California’s top marginal rate is 13.3% (income over $1,000,000). Most Inland Empire sellers fall in the 9.3% bracket.

---

Inherited Property: Step-Up Basis Under IRC §1014

Inherited homes receive a stepped-up basis to fair market value at the date of the decedent’s death under IRC §1014. This eliminates accumulated gains during the decedent’s lifetime.

Example:

• Parent bought in 1985 for $120,000
• FMV at date of death (2024): $680,000
• Your basis: $680,000
• You sell for $695,000 → taxable gain: $15,000 (not $575,000)

Prop 19 note: Since February 16, 2021, inherited properties in California are reassessed for property tax purposes unless the heir occupies the property as their primary residence within one year. This affects your ongoing property tax bill — it does not change the federal step-up basis under IRC §1014.

---

Rental Property: No §121 Exclusion

If you rented the home out for more than 3 years before selling, the §121 exclusion is either eliminated or reduced. Additionally:

• Depreciation recapture — the IRS taxes back the depreciation you claimed at 25% federally
• California taxes the recaptured depreciation as ordinary income at your state rate

1031 Exchange: Under IRC §1031, you can defer all capital gains and depreciation recapture if you reinvest the proceeds into a like-kind property within 45 days (identification) and 180 days (close). This requires working with a qualified intermediary — your escrow company alone is not sufficient.

---

Converting a Rental Back to Primary Residence

You can re-qualify for the §121 exclusion by living in the property as your primary residence for 2+ of the 5 years before sale. But after 2009, gains attributable to non-qualified use (the rental period) are excluded from the §121 exclusion. A tax professional can calculate the taxable percentage.

---

What Doesn’t Count as a Capital Gain

Selling costs reduce your gain:

• Agent commissions
• Title and escrow fees
• Transfer taxes
• Home improvements (add to basis)

These reduce the amount subject to tax. Keep records of every capital improvement — they permanently increase your cost basis.

---

The Bottom Line for IE Sellers

If you’re selling a home you’ve lived in for 2+ of the last 5 years and your gain is under $500,000 (married), you almost certainly owe $0 in capital gains tax. If you inherited the property, the step-up basis likely eliminates most or all of your taxable gain.

Rental property and high-gain sales above the §121 threshold are the cases where a CPA review before listing is worth the cost.

---

Selling a home in the Inland Empire and want to understand your net proceeds? Call me at 626-414-4859 for a free market analysis. I’ll show you what you’ll net after costs — your accountant handles the tax side, but I can run the numbers on your sale.