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Capital Gains When You Sell Your Home: The $500,000 Break Most Sellers Do Not Understand · Connor with Honor: AI, Real Estate and Real Life

• 0:00
  SPEAKER_00: Before I say one word about taxes, understand this.
• 0:02
  SPEAKER_00: I am not an accountant.
• 0:04
  SPEAKER_00: I'm not a CPA.
• 0:05
  SPEAKER_00: I'm not a tax attorney.
• 0:06
  SPEAKER_00: I'm a licensed real estate agent, and everything I'm about to lay out is general information, not tax advice for your specific situation.
• 0:14
  SPEAKER_00: Numbers move, your income, your filing status, your basis, and your history all change the answer.
• 0:20
  SPEAKER_00: Before you sign anything or spend a dollar based on what you hear here, sit down with your own CPA or tax attorney and have them run your exact numbers.
• 0:30
  SPEAKER_00: Now that we have that settled, let me walk you through capital gains on a home sale the way I would explain it to you at your kitchen table.
• 0:37
  SPEAKER_00: Because when I write it down and read it back to you, I learn it as well, and so do you.
• 0:42
  SPEAKER_00: A capital gain is not the price you sell for.
• 0:45
  SPEAKER_00: A lot of people get that wrong.
• 0:47
  SPEAKER_00: Your gain is the profit.
• 0:49
  SPEAKER_00: And the profit is your net sales price minus what the tax man calls your adjusted basis.
• 0:55
  SPEAKER_00: Your basis starts as what you paid for the house.
• 0:59
  SPEAKER_00: Then you add to it every capital improvement you made over the years as to your basis.
• 1:05
  SPEAKER_00: A new roof, a room addition, a pool, a new kitchen, new HVAC, new windows, solar you paid for, a block wall, permitted work of real substance.
• 1:16
  SPEAKER_00: Repairs don't count.
• 1:17
  SPEAKER_00: Fixing a leaky faucet is not an improvement.
• 1:21
  SPEAKER_00: Some of us may think so.
• 1:23
  SPEAKER_00: Replacing the whole plumbing system is.
• 1:25
  SPEAKER_00: You can add most of your buying and selling costs, things like closing costs when you bought, your real estate commissions that you paid, title and escrow fees when you sell, all of that raises your basis.
• 1:37
  SPEAKER_00: And the higher your basis, the smaller your taxable gain.
• 1:41
  SPEAKER_00: That's the first lesson.
• 1:42
  SPEAKER_00: And it is the one people ignore.
• 1:45
  SPEAKER_00: Keep your receipts, every improvement receipt, you save it, you save is basis.
• 1:50
  SPEAKER_00: Every dollar of basis is a dollar of profit, the government cannot tax.
• 1:55
  SPEAKER_00: If you did 30 years of work on a Santa Clarita house and you have no records, you just handed away the proof that may have lowered your taxes.
• 2:03
  SPEAKER_00: So the formula is simple.
• 2:05
  SPEAKER_00: Sales price minus selling costs gives you your amount realized minus your adjusted basis gives you your gain.
• 2:13
  SPEAKER_00: Next question is how long you owned it, because that decides the tax rate.
• 2:18
  SPEAKER_00: If you own the property one year or less, that is a short-term gain, and it gets taxed at the ordinary income rates, the same as a paycheck.
• 2:26
  SPEAKER_00: Almost nobody who lives in a home sells that fast, so for most sellers, we're talking about long-term gains, which means you owned it more than a year.
• 2:35
  SPEAKER_00: And long-term gains get the friendlier federal rates.
• 2:39
  SPEAKER_00: Now, here's where the biggest break in the whole tax code comes in for a homeowner, and it's called Section 121 exclusion.
• 2:46
  SPEAKER_00: The primary residence exclusion.
• 2:49
  SPEAKER_00: If the home you're selling was your main home and you owned it and lived in it as your primary residence for at least two years out of the last five years before the sale, you can exclude a huge chunk of gain from your tax entirely.
• 3:01
  SPEAKER_00: Now, if you're single, you can exclude up to$250,000 of gain.
• 3:05
  SPEAKER_00: If you're married filing jointly, you can exclude up to$500,000 of gain.
• 3:11
  SPEAKER_00: That's not a deduction.
• 3:13
  SPEAKER_00: That is gain that simply never gets taxed, federal or state of California.
• 3:19
  SPEAKER_00: The two years do not have to be back-to-back.
• 3:22
  SPEAKER_00: You just need 24 months of ownership and 24 months of living there inside the five-year window.
• 3:29
  SPEAKER_00: That's a frequency limit.
• 3:30
  SPEAKER_00: You can use this exclusion once every two years.
• 3:34
  SPEAKER_00: So you cannot flip primary residences every 12 months and keep claiming it.
• 3:39
  SPEAKER_00: And here's the number that surprises people.
• 3:41
  SPEAKER_00: The 250,000 and 500,000 hasn't changed since 1997.
• 3:48
  SPEAKER_00: It is not indexed to inflation.
• 3:50
  SPEAKER_00: Home values in Santa Clarita have multiplied several times over since 1997.
• 3:56
  SPEAKER_00: But that exclusion has stood still, which means more sellers today blow past it than ever did back then.
• 4:02
  SPEAKER_00: There are partial exclusions if you had to move early for a specific reason, a job relocation, a far enough distance, a health problem, certain unforeseen circumstances.
• 4:13
  SPEAKER_00: And in those cases, you get a prorated piece of the exclusion based on how long you were there.
• 4:19
  SPEAKER_00: Again, this is a conversation for your CPA or tax attorney.
• 4:23
  SPEAKER_00: Let me put then real Santa Clarina numbers so you can see it work.
• 4:27
  SPEAKER_00: So say a married couple bought a house in Saugus back in 2004 for$525,000.
• 4:34
  SPEAKER_00: Over the year they put in a new roof, a remodeled kitchen, new heating and air, and a pool.
• 4:39
  SPEAKER_00: And they kept the receipts.
• 4:41
  SPEAKER_00: That adds up to$75,000 of real capital improvements.
• 4:45
  SPEAKER_00: Their adjusted basis is now$600,000.
• 4:49
  SPEAKER_00: They sell in 2026 for$1,150,000.
• 4:54
  SPEAKER_00: And after commissions and closing costs of about$70,000, their amount realized is$1,080,000.
• 5:02
  SPEAKER_00: Their gain is$1,080,000 minus$600,000, which is$480,000.
• 5:10
  SPEAKER_00: They are married, they lived there the whole time, so they get the$500,000 exclusion.
• 5:17
  SPEAKER_00: $480,000 is under$500,000.
• 5:21
  SPEAKER_00: Their entire gain is excluded.
• 5:23
  SPEAKER_00: They owe federal capital gains tax and zero California tax on that sale.
• 5:29
  SPEAKER_00: That is the power of the exclusion.
• 5:31
  SPEAKER_00: And notice that the$75,000 is in improvements, they could prove is what kept them under the line.
• 5:39
  SPEAKER_00: Now let me change one number and show you the other side.
• 5:41
  SPEAKER_00: Same couple, same basis of$600,000, but the market runs hotter and they sell for$1,450,000 with selling costs of$85,000.
• 5:52
  SPEAKER_00: So their amount realized is$1,365,000.
• 5:57
  SPEAKER_00: Their gain is now$765,000.
• 6:00
  SPEAKER_00: They subtract the$500,000 exclusion, and that leaves$265,000 of taxable gain.
• 6:09
  SPEAKER_00: That is the part that gets taxed.
• 6:11
  SPEAKER_00: So what is the rate on the leftover gain?
• 6:16
  SPEAKER_00: On the federal side in 2026, long-term capital gains sit in three buckets: 0%, 15%, and 20%.
• 6:25
  SPEAKER_00: And which bucket you land in depends on your total taxable income for the year, not just the gain.
• 6:31
  SPEAKER_00: For the married couple filed jointly in 2026, the 0% rate applies up to about$98,900 of total taxable income.
• 6:42
  SPEAKER_00: The 15% rate runs from there up to about$613,700, and the 20% rate kicks in above$613,700 for a single filer in 2026.
• 6:55
  SPEAKER_00: Zero percent runs up to about$49,450.
• 7:02
  SPEAKER_00: 15% runs up about$545,500, and 20% applies above that.
• 7:08
  SPEAKER_00: Most Santa Clarita sellers with normal working incomes are going to see that leftover gain taxed at the 15% federal rate.
• 7:17
  SPEAKER_00: So on that$265,000 of taxable gain at 50%, that's right around$39,750 of federal capital gains tax.
• 7:27
  SPEAKER_00: But we're not done because there's a second federal layer called the net investment income tax, the NIIT.
• 7:36
  SPEAKER_00: And it's an extra 3.8%.
• 7:38
  SPEAKER_00: It hits when your modified adjusted gross income goes over$200,000 if you're single or$250,000 if you're married filing jointly.
• 7:49
  SPEAKER_00: And it's just like the home exclusion, those thresholds have never been adjusted for inflation since they started in 2013.
• 7:57
  SPEAKER_00: A big home sale gain can push you over that line.
• 8:00
  SPEAKER_00: And the 3.8% applies to the gain that sits above the exclusion to the extent that you're over the threshold.
• 8:08
  SPEAKER_00: So a high enough gain can carry both the 20% federal rate and the extra 3.8% on top.
• 8:14
  SPEAKER_00: Then comes California.
• 8:16
  SPEAKER_00: And California doesn't play the federal game.
• 8:20
  SPEAKER_00: California has no special lower rate for gains.
• 8:23
  SPEAKER_00: None.
• 8:23
  SPEAKER_00: The state taxes your capital gain exactly like ordinary income, like wages.
• 8:29
  SPEAKER_00: California brackets in 2026 run from 1% at the bottom all the way up to 12.3%, and there's an additional 1% mental health services surcharge on taxable income over$1 million, which pushes the true top rate to 13.3%, the highest rate state in the country, where your leftover gain lands in those brackets, depends on your total California income for a year.
• 8:58
  SPEAKER_00: For a lot of sellers, that added gain gets taxed somewhere in the 9.3% range at that margin.
• 9:04
  SPEAKER_00: And for higher earners, it climbs, of course, higher.
• 9:07
  SPEAKER_00: The good news is California does honor the same Section 121 primary residence exclusion, so that$250,000 or$500,000 you excluded federally is also excluded on your California return.
• 9:21
  SPEAKER_00: It is only the leftover, the part above the exclusion.
• 9:24
  SPEAKER_00: That California taxes as an ordinary income.
• 9:28
  SPEAKER_00: Now there's one more California item that catches sellers off guard at the closing table, and it's not actually a tax, it's prepayment.
• 9:35
  SPEAKER_00: It is called real estate withholding, and it runs on a form called Form 593.
• 9:40
  SPEAKER_00: When you sell California real estate, the state generally requires that 3.13%, 3.33% of the gross sales price be withheld accent to the franchise tax board as a prepayment against whatever California tax you will owe.
• 9:57
  SPEAKER_00: On a million-dollar sale, that's$33,300 held back.
• 10:03
  SPEAKER_00: Now here's the relief.
• 10:04
  SPEAKER_00: If your sale qualifies for the primary residence exclusion, or you can certify that on the form and be exempt from the withholding.
• 10:13
  SPEAKER_00: And withholding is also not required when the sales price is$100,000 or less.
• 10:18
  SPEAKER_00: And even when it does apply, it is not lost money.
• 10:22
  SPEAKER_00: It's a deposit.
• 10:23
  SPEAKER_00: It gets credited against your actual California tax when you file.
• 10:27
  SPEAKER_00: And if too much was withheld, you get it back.
• 10:30
  SPEAKER_00: And there is also an option to elect withholding based on the actual gain instead of the full sales price, which your escort officer and your tax person can help you calculate if the flat 3.33% would overwithhold you.
• 10:46
  SPEAKER_00: Now let me talk about the sellers whose property is not their primary residence because the rules change hard.
• 10:52
  SPEAKER_00: If you're selling a rental property or an investment property, you do not get the Section 121 exclusion at all.
• 10:58
  SPEAKER_00: That break is only for your main home.
• 11:00
  SPEAKER_00: And there's a second bite on a rental that people forget about called depreciation recapture.
• 11:06
  SPEAKER_00: When you own a rental, the IRS lets you, actually expects you, to depreciate the building, not the land, over 27 and a half years for a residential rental.
• 11:16
  SPEAKER_00: And each year of depreciation lowers your taxable rental income, but it also lowers your basis dollar for dollar.
• 11:23
  SPEAKER_00: So when you sell all of that depression you took or were allowed to take comes back as its own layer of gain called unrecaptured Section 1250 gain.
• 11:34
  SPEAKER_00: And it is taxed at a federal rate of up to 25% higher than the normal long-term rate.
• 11:40
  SPEAKER_00: And here's the part that stings.
• 12:25
  SPEAKER_00: Said plainly first, keep every improvement receipt for as long as you own the property, because basis is the cheapest tax saving there is.
• 12:34
  SPEAKER_00: Second, know your dates.
• 12:35
  SPEAKER_00: Owning and living in the home, two of the last five years is what unlocks the exclusion.
• 12:40
  SPEAKER_00: And selling one day too early can cost you a quarter million or half a million in shelter.
• 12:46
  SPEAKER_00: Third, mind the frequency rule.
• 12:49
  SPEAKER_00: Once every two years on the exclusion.
• 12:51
  SPEAKER_00: And fourth, time your sale with your income in mind when you can, because that same gain can sit in the zero, 15, or 20% federal bucket, depending on your total income that year.
• 13:03
  SPEAKER_00: Fifth, if it is investment property, look hard at a 1031 exchange before you sell, not after, because after you close, it's too late.
• 13:11
  SPEAKER_00: And six, the quiet one that ties into the long game.
• 13:16
  SPEAKER_00: When you die, your heirs get what is called a step-up basis.
• 13:21
  SPEAKER_00: The property resets to its fair market value on the date of death.
• 13:25
  SPEAKER_00: And all that buildup gain, the whole thing, disappears for tax purposes.
• 13:30
  SPEAKER_00: Which means for some owners, the best tax move on a highly appreciated property is to hold it, borrow against it if they need liquidity, and let their hairs, their heirs inherit it clean.
• 13:42
  SPEAKER_00: That's not right for everyone.
• 13:43
  SPEAKER_00: And it's going to make with a tax professional and a real estate attorney, but it's real.
• 13:48
  SPEAKER_00: And it's the reason wealthy families hold real estate for generations.
• 13:52
  SPEAKER_00: So that's capital gains on a home in Santa Clarita and Los Angeles County.
• 13:56
  SPEAKER_00: Your gain is the sales price minus selling cost minus adjusted basis.
• 14:00
  SPEAKER_00: Your primary residence can shelter 250,000 single or 500,000 married if you owned and lived there for two of the last five years.
• 14:11
  SPEAKER_00: Federal long-term rates are zero, 15, or 20%, depending on income, plus a possible 3.8% surtax.
• 14:19
  SPEAKER_00: California taxes, whatever's left is ordinary income, up to 13.3%, and holds back 3.33% in closing, unless you are exempt.
• 14:29
  SPEAKER_00: Rentals lose the exclusion and add depreciation recapture at up to 25% federal, and death resets the basis and wipes the slate.
• 14:38
  SPEAKER_00: Run your own exact numbers with your CPA or tax attorney before you make a move because this is your money and the details are where it lives.
• 14:46
  SPEAKER_00: This is the whole picture, plain and complete.
• 14:49
  SPEAKER_00: I'm Connor with Honor.
• 14:50
  SPEAKER_00: We'll see you in the next one.