Probate, trusts, taxes and divorce
Capital Gains, the Home Sale Exclusion and Stepped-Up Basis in California
The home sale exclusion, stepped-up basis on an inherited home and the records to keep, explained with simple math.
Do you pay capital gains tax when you sell your house?
Many people don't, or they owe much less than they feared. Federal tax law lets you leave out a large part of the gain on your main home if you qualify. And if you inherited the house, the gain is often figured from the value at the date of death, not from what your parents paid.
The gain is roughly what you sell for, minus your selling costs, minus your basis. Basis starts with what you paid and grows with improvements. That's the math we walk you through below, with the IRS sources so you and your CPA can read them yourself.
This is general information, not tax advice. Your situation has details that change the answer, so run the numbers with a CPA or tax advisor before you sell. Your CPA will also figure the California side.
How much of the gain on your home can you exclude?
IRS Publication 523 (2025), Selling Your Home, says you may be able to exclude up to $250,000 of gain if you're single, or up to $500,000 if you're married filing jointly.
To qualify, Publication 523 lays out these tests:
- Ownership. You owned the home for at least 24 months in the 5 years before the sale.
- Use. You lived in it as your main home for at least 24 months in those same 5 years. The months don't have to be in a row.
- Timing. You generally can't use the exclusion if you used it on another home sold in the 2 years before.
- Married couples. For the full $500,000 on a joint return, only one spouse needs to meet the ownership test, but each spouse must meet the use test.
A worked example in words: a married couple bought their home for $300,000 and added $50,000 in improvements, so their basis is $350,000. They sell for $950,000 and pay $50,000 in selling costs. Their gain is $950,000 minus $50,000 minus $350,000, or $550,000. They exclude $500,000, and $50,000 is a taxable gain. Their CPA figures the tax on that amount.
There are partial exclusions for some moves for work, health or other unforeseen events. Publication 523 explains them, and your CPA can tell you if one fits.
What is stepped-up basis on an inherited house?
When you inherit a house, your basis generally isn't what your parents paid. IRS Publication 551 (revised December 2025) says the basis of inherited property is generally its fair market value on the date of death. The estate's personal representative can sometimes choose a later "alternate valuation date" instead. Publication 523 adds that if an estate tax return was filed or required, the value on that return is your basis.
That new, higher starting point is what people call a stepped-up basis. Here's why it matters, in words:
Say your parents bought their home for $90,000 decades ago. It's worth $750,000 on the date your mom passes. Your basis is about $750,000, not $90,000. If you sell a few months later for $760,000 and pay $45,000 in selling costs, you net $715,000. That's below your basis, so you may have no taxable gain at all.
This is why a written value at the date of death is worth getting early. An appraisal, or a custom home valuation from a local agent built on sales from that time, helps your CPA document the number. Maggie has written more on this in California inherited property tax laws explained.
How does community property get a double step-up in California?
California is a community property state, and that can be a big help to a surviving spouse.
IRS Publication 551 (revised December 2025) says that in community property states, each spouse is usually considered to own half the community property. When one spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property, as long as at least half of it is included in the decedent's estate.
In plain words: if the house was community property, both halves can step up to the value at the first spouse's death, not just the half that belonged to the spouse who died.
A worked example in words: a couple bought their home for $150,000. It's worth $800,000 when the husband dies. If the house was community property, the wife's basis in the whole house is generally $800,000. If it was held another way, only the husband's half may step up, and her basis could be closer to $475,000. That's a $325,000 difference in basis.
How title was held, and what the couple's estate plan says, decides which rule applies. This is exactly the kind of question to bring to a CPA and an estate attorney before you list. Publication 523 also says a surviving spouse may be able to use the $500,000 exclusion if the home is sold within 2 years of the spouse's death and other conditions are met.
Is there tax if you sell an inherited home soon after?
Often there's little or none, because of the stepped-up basis. If the house sells for close to its date-of-death value, after selling costs the gain may be small or even a loss.
Two more points help:
- It counts as long-term. IRS Publication 544 (2025) says inherited property is treated as held longer than 1 year, regardless of how long you actually held it. Long-term gains generally get lower federal rates than short-term gains.
- The home sale exclusion usually isn't the tool here. The exclusion requires you to have owned and lived in the home yourself for 24 of the last 60 months. Most heirs who sell a parent's home haven't, so the stepped-up basis does the work instead.
If the house sits for a few years and rises in value, the increase after the date of death is a gain. Some heirs rent the house first. That changes the tax picture again, so talk with your CPA before you decide. Our guide to selling a house held in a trust covers the trustee's side of the sale.
What if the home was a rental or you claimed depreciation?
Depreciation is the deduction landlords take for wear on a rental. It lowers your taxes while you own the property, and some of it comes back when you sell.
- IRS Publication 523 says you can't exclude the part of your gain equal to depreciation allowed or allowable for periods after May 6, 1997. That holds even if the home was your main home when you sold it.
- IRS Topic No. 409 (last reviewed September 24, 2026) says unrecaptured section 1250 gain from selling real property is taxed at a maximum rate of 25%.
- Publication 523 also says periods after 2008 when the home wasn't your main home, called nonqualified use, can reduce the gain you can exclude. Rental time after you move out generally doesn't count against you this way.
If you're selling a rental, our guide on selling a rental: 1031 exchange or cash out walks through the choices.
What records should you keep to prove your basis?
IRS Publication 523 says to keep records that document the home's adjusted basis, and to keep them until 3 years after the due date of the return for the year you sold. Publication 523 also says you add the cost of additions and improvements to basis. Ordinary repairs, such as painting or fixing a leak, generally aren't added.
A practical list to gather:
- Your closing statement from the purchase.
- Receipts and permits for improvements: a new roof, a remodel, an addition, new windows, solar, a pool.
- For an inherited home: the death certificate and the date-of-death value, such as an appraisal or a custom home valuation built on sales from that date.
- For a rental: every year's depreciation figures from your tax returns.
- Your closing statement from the sale, which shows your selling costs.
Lost the receipts? Start with what you can find. Contractors, permit records and old bank statements can fill gaps. Your CPA decides what's enough.
How do you plan the sale around the tax?
Timing can change the tax more than price does. A few questions to ask your CPA before you list:
- Have we met the 24-of-60-months tests, or should we wait a few months?
- Did either of us use the exclusion on another home in the last 2 years?
- If a spouse has died, are we within 2 years of the death for the $500,000 exclusion?
- Was the house community property, and do we have a date-of-death value?
- Is any depreciation going to be taxed?
We can give you a written price range and a net sheet so your CPA works from real numbers. If you're 55 or older and buying again in California, our Prop 19 page covers carrying your property tax base. Maggie has also written what seniors should know about capital gains before selling.
How do you get started figuring your gain?
Pull together your purchase closing statement and any improvement receipts. Then get a current value. Our home value check is a good first step. We'll turn that into an estimated net from the sale, so you and your CPA can see the gain before you decide anything.
Send us a note or call Maggie's cell at (916) 549-3131. If you're selling soon, our free seller guide covers the rest of the process.
Frequently Asked Questions
How much capital gain can I exclude when I sell my home?
IRS Publication 523 (2025) says up to $250,000 if you're single, or up to $500,000 if you're married filing jointly, when you meet the ownership and use tests. Your CPA confirms how it applies to you.
How long do I have to live in my house to avoid capital gains?
Publication 523 says you must have owned it and lived in it as your main home for at least 24 months in the 5 years before the sale. The months don't have to be in a row.
What is a stepped-up basis?
When you inherit property, your basis is generally its fair market value on the date of death, not what the original owner paid. IRS Publication 551 explains it. That often means little or no taxable gain if you sell soon after.
Does a surviving spouse get a full step-up in California?
Often, if the home was community property. IRS Publication 551 says the total value of community property generally becomes the basis of the entire property when one spouse dies, if at least half is included in the decedent's estate. Ask your CPA how your title was held.
Is an inherited house a long-term or short-term gain?
Long-term. IRS Publication 544 says inherited property is treated as held longer than 1 year, regardless of how long you actually held it.
Do I pay tax on depreciation when I sell a former rental?
Usually, yes. Publication 523 says gain equal to depreciation after May 6, 1997 can't be excluded, and IRS Topic No. 409 says unrecaptured section 1250 gain is taxed at a maximum 25% rate.
How long should I keep records of my home's basis?
Publication 523 says to keep them until 3 years after the due date of the return for the year you sold the home. Many owners keep purchase and improvement records for as long as they own the home.
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