Selling your home can mean a big payday, but taxes—especially capital gains—are an important factor to understand before you close. Misunderstanding or ignoring them could leave you with unexpected bills, while planning ahead can maximize your profits and give peace of mind.
I’m Dennis Loewen with North and Main Homes, and here’s a simple breakdown of capital gains and what San Jose homeowners need to know when selling.
What Are Capital Gains?
A capital gain is the profit you make when you sell an asset, like a home, for more than your original purchase price. For most homeowners, this is the difference between the amount you sell your house for and what you paid for it, plus any major improvements that increased the value of your home.
The government taxes these gains because they are considered income. However, primary residences have special exclusions that can significantly reduce or even eliminate the tax you owe—if you meet certain criteria.
The Homeowner Exclusion
The biggest relief for most sellers comes from the homeowner exclusion. If you’ve lived in your home as your primary residence for at least two of the last five years, you may exclude:
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Up to $250,000 of gains if you’re single
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Up to $500,000 if you’re married and filing jointly
This means that if your gain is below these thresholds, you may not owe any federal capital gains tax at all. Keep in mind that “lived in” means actual residence—not just ownership—so the two years don’t need to be consecutive, but they must add up to 24 months within the five-year window.
Calculating Your Cost Basis
To determine your taxable gain, start with your cost basis. This is essentially what you paid for the home, plus major improvements made during your ownership. Things like a new roof, kitchen remodel, or additional bathroom usually count toward your cost basis, while routine maintenance like painting or lawn care does not.
Example:
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Purchase price: $700,000
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Major improvements: $50,000
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Sale price: $1,000,000
Taxable gain = $1,000,000 – ($700,000 + $50,000) = $250,000
If you are single, that would exactly match the exclusion limit, meaning no federal capital gains tax would be due.
Special Situations
Some homes don’t fit the standard scenario. Examples include:
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Inherited properties: These often get a “stepped-up basis,” which can reduce or eliminate the capital gain.
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Rental homes or second properties: Gains may be fully taxable, depending on depreciation and usage.
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Multi-owner properties: If the home was jointly owned, each owner’s exclusion may differ.
If your situation is non-standard, consulting a tax professional before you close is critical. Proper planning can save thousands in taxes and prevent surprises after the sale.
State Taxes Matter Too
California has its own capital gains rules. Gains from the sale of a home are typically included in your state income taxes, which can range up to 13.3%. Even if you qualify for the federal exclusion, you may still owe state taxes in certain circumstances—especially if your home was used partially as a rental or investment.
Timing Your Sale
Sometimes, timing your sale can influence taxes. Selling during a year when you have other deductions or income losses can offset gains. Discussing timing with a CPA or tax advisor can make a meaningful difference.
Documentation Is Key
Keep meticulous records of:
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Purchase price and closing costs
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Major improvements (receipts and contracts)
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Any depreciation claimed (if used as rental)
Having these on hand ensures your calculations are accurate and gives peace of mind if questions arise during tax filing.
Why Consult Professionals
Even if your home seems straightforward, real estate tax law can be tricky. A local CPA or tax advisor familiar with San Jose property sales can help you:
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Confirm your eligibility for exclusions
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Maximize your cost basis
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Navigate complex situations like inherited or partially rented homes
Planning early—before listing or accepting offers—makes the process smoother and reduces stress.
🎥 Watch the full video here → Avoid Surprising Capital Gains
For local expertise and trusted financial referrals, reach out to Dennis Loewen with North and Main Homes. Selling your home is exciting, and understanding capital gains ensures you keep the maximum benefit from your sale.
