Guides

Home Sale Capital Gains Tax

Selling a primary residence in San Diego, CA generally triggers a different set of rules than selling an investment property, because Section 121 of the Internal Revenue Code generally allows a homeowner to exclude up to two hundred fifty thousand dollars of gain if filing single, or up to five hundred thousand dollars if married filing jointly, as long as the owner has owned and used the home as a primary residence for at least two of the five years before the sale. Given how much San Diego, CA home values have appreciated over long ownership periods, especially in coastal and central neighborhoods, many long-term owners find that their gain exceeds even the five hundred thousand dollar married exclusion, meaning the excess is generally taxed as a standard capital gain at federal long term rates and as ordinary income under California's state schedule. The calculation gets more complicated when a home was not used exclusively as a primary residence for the entire ownership period. If the property was rented out for a stretch of time, whether before moving in, after moving out, or during a temporary relocation, the portion of gain allocated to that non-qualified use period is generally not eligible for the Section 121 exclusion, and any depreciation claimed during a rental period is generally recaptured and taxed regardless of the exclusion. This is a common situation for San Diego, CA owners who purchased a home, rented it for a few years while living elsewhere, and then moved back in before selling, or for owners who converted a portion of the home, such as an accessory dwelling unit, into a long term rental. In these mixed use situations, a taxpayer can sometimes combine the Section 121 exclusion on the primary residence portion with a Section 1031 exchange on the rental portion, under guidance the Internal Revenue Service issued in Revenue Procedure 2005-14, but the eligibility rules are technical and depend on how the property was actually used and reported. Homeowners who are unsure whether their sale looks more like a primary residence sale or an investment property sale, particularly those who have rented part or all of a San Diego, CA property at some point, should generally get a specific read from a tax advisor before listing, since the exclusion and any exchange planning both depend heavily on documented use history. Educational content only. This is not tax, legal, or investment advice, and homeowners should confirm their eligibility for the Section 121 exclusion and any exchange planning with a qualified tax professional.