Selling Your Home? Here’s What You Need to Know About Capital Gains Taxes

If you’re thinking about selling your home in the Coachella Valley, you might be wondering: Will I owe taxes on the sale? The answer is... maybe.

Here’s a breakdown of how capital gains taxes work when you sell a primary residence—and what steps you can take to reduce or avoid a surprise tax bill.

What Is a Capital Gain?

A capital gain is the profit you make from selling something at a higher price than you paid for it. In real estate, it’s calculated as:

Sale Price - Purchase Price - Allowable Expenses = Capital Gain

Allowable expenses may include:

• Realtor commissions

• Escrow and title fees

• Certain home improvements (not repairs)

The Capital Gains Exclusion Rule

Good news: if the home was your primary residence for at least 2 of the last 5 years, you may qualify for the IRS capital gains exclusion.

• $250,000 exclusion if you’re single

• $500,000 exclusion if you’re married filing jointly

This means you can make up to that amount in profit without paying federal capital gains taxes.

What Qualifies as a Primary Residence?

To qualify, you must have:

• Owned the home for at least 2 years

• Lived in it as your primary residence for at least 2 of the last 5 years

Note: The time doesn’t have to be consecutive, and the home must not have been used exclusively as a rental during that period.

What If the Home Is Held in a Trust?

If the home is held in a revocable living trust, the IRS treats it as if you still personally own the property. That means:

• If you are the grantor (the person who created the trust) and you meet the ownership and use tests, you can still qualify for the $250,000/$500,000 capital gains exclusion.

• If you are the trustee selling the home after the original owner has passed, the tax treatment depends on the trust structure and whether the property receives a stepped-up basis at death.

• The trustee may be responsible for paying capital gains taxes on behalf of the trust or beneficiaries if the home has appreciated and no exclusion applies.

Bottom line: A trust doesn’t eliminate tax obligations—but when structured properly, it doesn’t prevent you from taking full advantage of homeowner exclusions either.

What If You Don’t Qualify?

If the home was an investment property, second home, or you didn’t meet the 2-year test, you may owe capital gains taxes. In 2025, those rates range from 15% to 20% federally, depending on your income level.

Also, California applies its own state income tax on the gain, with rates ranging from 1% to 13.3%.

Can You Reduce the Taxable Amount?

Yes! You can reduce your capital gain by tracking and documenting:

• Major improvements (e.g., room additions, HVAC replacement, kitchen remodels)

• Selling costs (agent fees, staging, closing costs)

• Depreciation (if the home was ever used as a rental)

When to Talk to a Pro

If your profit is likely to exceed the IRS exclusion—or you’ve owned rental property, inherited a home, or recently converted a primary to a rental—you need to talk to a CPA or tax attorney.

They can help with advanced strategies like 1031 exchanges, stepped-up basis rules, or deferring taxes through trusts.

Bottom line: Taxes don’t have to be scary—but ignoring them can be costly. A little planning can go a long way toward keeping more of your equity.

Need help preparing your home for sale or figuring out how the numbers will shake out? Let’s talk.

Schedule your home equity review and strategy session today.