Selling your home feels like a win until tax season rolls around. If you're in California, the taxman doesn’t forget you exist just because you moved out. But there are ways to keep more of your profits where they belong: your pocket.
Let’s walk through the legal methods to avoid or reduce taxes when selling your house.
Start with the Home Sale Exclusion
The IRS gives homeowners a nice break if they’ve lived in the house. If you owned and lived in your home for two out of the last five years, you could exclude:
- Up to \$250,000 in gains if you’re single.
- Up to \$500,000 if you’re married and file jointly.
No loopholes, no tricks, just straight-up policy. If your profit falls under those numbers, you might owe nothing in federal capital gains tax. California still wants its cut, though, so keep reading.
California Wants In Too
California doesn’t follow the IRS rule exactly. While the federal government gives you that capital gains exclusion, California still taxes gains as regular income.
Let’s say you cleared \$300,000 on the sale. The IRS might ignore the first \$250K, but California could tax the whole thing depending on your income bracket. And yes, it adds up fast.
That means you have to think beyond federal rules if you want to keep your taxes low.
Track Every Improvement
That kitchen remodel from 2017? The HVAC system you replaced in 2020? Don’t toss those receipts.
Here’s why: Capital improvements reduce your profit, which means less taxable gain.
You bought the house for \$400,000. You sold it for \$750,000. On paper, you made \$350,000. But if you spent \$50,000 on real upgrades, ones that added value and extended the home’s life you now only profited \$300,000.
Big difference. Especially when taxes hit hard after \$250K.
Know What Doesn’t Count
Not all home expenses qualify. Fixing a leaky faucet doesn’t reduce your gains. Replacing a busted water heater with another basic water heater? Nope.
But if you upgraded to tankless or installed solar panels? That counts. So, before you sell, go through records and sort the fluff from the real upgrades. Every dollar counts.
Use a 1031 Exchange (If You’re Selling Investment Property)
Own a rental? You may be able to defer capital gains taxes using a 1031 exchange. That’s where you roll the profit from one property into another “like-kind” property.
- But this isn’t a free pass. You’ve got strict deadlines:
- You must identify the next property within 45 days
- You must close on it within 180 days
Also, this only works for investment properties, not your primary home. If you try this on your family's house, the IRS will notice. And it won’t end well.
Sell During a Low-Income Year
This one’s often overlooked. If you’re retiring, changing careers, or taking time off, you might be in a lower tax bracket than usual. That’s a good time to sell.
Why? Capital gains are taxed based on your income. Lower bracket = lower tax rate.
For federal taxes:
If your income is under \$44,625 (single) or \$89,250 (married), you may pay 0% in capital gains tax.
It won’t dodge California’s income tax, but it helps.
Gifting or Inheriting Isn’t Always the Smart Play
You might think, “I’ll just give the house to my kids.” Not so fast.
Gifting your house while you’re alive gives them your original purchase price as their cost basis. That can trigger big taxes when they sell.
But if they inherit it after your death? The cost basis resets to market value at the time of death, often cutting or eliminating capital gains taxes.
It’s cold math, but it’s how the law works. Always speak to a tax pro before deciding.
Watch Out for Depreciation Recapture
If you’ve been claiming depreciation on a rental property, expect recapture taxes when you sell.
This isn’t optional. The IRS treats it like you took extra income each year. When you sell, they want some of it back, usually taxed at 25%.
If that sounds painful, it is. But knowing ahead of time gives you more options to plan.
Use Tax-Loss Harvesting (If You Invest)
If you’re into stocks or crypto, you might be sitting on paper losses. Selling those losers the same year you sell your house could offset some of your gains.
It’s not the most intuitive strategy, but it works if timed correctly. It’s all about the net number on your tax return.
Again, not a DIY move, this one’s accountant territory.
Consider Installment Sales
You don’t have to take all the money at once. With an installment sale, you sell the house but take payments over time. That way, you only report a portion of the gain each year.
This could keep you in a lower bracket and spread out the tax hit. Not great if you want a lump sum, but a helpful option if taxes are your main concern.
Taxes are unavoidable but overpaying is optional. If you're in California, the rules are more aggressive than in most states. That means the stakes are higher, especially if you're selling a high-value property or rental.
Talk to a tax advisor. Not later—before you list the house.
Selling your home is a big win. Just don’t let the IRS and Franchise Tax Board take a bigger slice than they deserve.
