Selling Your California Home in 2026: Tax Exclusions, Capital Gains, and What’s Changed
Summer is peak home-selling season in California — and if you’re planning to sell in 2026, the tax implications are more complex than in previous years. The One Big Beautiful Bill Act (OBBBA) preserved the home sale exclusion and stepped-up basis but changed the SALT cap, restored bonus depreciation (affecting rental-to-primary conversions), and left California’s capital gains rate untouched at up to 13.3%. Add in Proposition 19’s impact on inherited properties, and selling a home in California requires careful tax planning.
At The Law Office of Pietro Canestrelli, we help homeowners across Temecula, San Diego, Riverside, San Bernardino, and throughout California understand and minimize the tax consequences of selling their homes. Here’s what you need to know in 2026.
The Primary Residence Exclusion: $250,000 / $500,000
Under IRC Section 121, you can exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) from the sale of your primary residence. This exclusion is available if you meet two tests:
- Ownership test: You owned the home for at least 2 of the 5 years before the sale
- Use test: You used the home as your primary residence for at least 2 of the 5 years before the sale
The 2 years don’t have to be consecutive — they just need to total 24 months within the 5-year lookback period. You can generally use this exclusion only once every 2 years.
For many California homeowners, especially those who purchased their homes 10-20+ years ago, appreciation has exceeded the exclusion. A home purchased for $300,000 in 2005 and sold for $950,000 in 2026 produces $650,000 in gain — of which only $500,000 is excludable for a married couple. The remaining $150,000 is subject to both federal and California capital gains tax.
For more detail on the exclusion rules, see our taxes on home sales page.
California Capital Gains: The State Bite
California taxes capital gains as ordinary income — meaning the state doesn’t offer a preferential capital gains rate. For high-income sellers, the California tax rate on home sale gains can reach 13.3% (the top marginal rate on income above $1 million).
Combined with the federal long-term capital gains rate of 15-20% (plus the 3.8% Net Investment Income Tax for high earners), the total tax burden on a non-excluded home sale gain in California can exceed 37%.
For a married couple with $200,000 in non-excluded gain, the combined federal and California tax could approach $60,000-$74,000 depending on their overall income. This is why the exclusion is so valuable — and why maximizing it through proper planning is critical.
What If You Don’t Qualify for the Full Exclusion?
Several common situations can limit or eliminate the Section 121 exclusion:
Partial Exclusion
If you don’t meet the 2-year ownership or use requirement, you may qualify for a partial exclusion if the sale was due to a change in employment, health reasons, or unforeseen circumstances. The partial exclusion is prorated — if you lived in the home for 1 year out of the required 2, you can exclude up to 50% of the maximum ($125,000 single / $250,000 joint).
Rental-to-Primary Conversion
If you converted a rental property to your primary residence, special rules apply. You can use the Section 121 exclusion, but gain attributable to depreciation claimed after May 6, 1997 is not excludable. This “depreciation recapture” is taxed at a flat 25% federal rate — plus California’s ordinary income rate.
Additionally, gain attributable to periods of non-qualified use (rental use) after January 1, 2009 is not eligible for the exclusion. For California business owners who have rented out their homes, the calculations can be complex. Our team can help you model the tax impact before you list.
High-Income Sellers and the NIIT
Sellers with modified adjusted gross income above $200,000 (single) or $250,000 (joint) may owe the 3.8% Net Investment Income Tax (NIIT) on the non-excluded portion of their home sale gain. The NIIT applies to the lesser of net investment income or the excess of MAGI over the threshold. For a couple with $300,000 in ordinary income plus a $200,000 non-excluded gain, the NIIT could add $7,600 to the tax bill.
The SALT Cap and Mortgage Interest: New Math in 2026
The OBBBA’s increase of the SALT cap to $40,000 affects home-related deductions in two ways:
- Property tax deduction: If you sell mid-year, your property tax deduction for 2026 is prorated based on your ownership period. Under the $40,000 cap, more homeowners can fully deduct their property taxes — but only if they itemize.
- Mortgage interest: Interest on up to $750,000 of acquisition indebtedness ($1 million for loans originated before December 15, 2017) remains deductible. The combination of higher SALT cap + mortgage interest makes itemizing more attractive for homeowners than it was under the $10,000 cap.
Read our SALT deduction guide and mortgage interest deduction article for more detail.
1031 Exchanges: Deferring Gains on Investment Properties
The Section 121 exclusion applies only to primary residences. If you’re selling an investment or rental property, the exclusion is not available — but you may be able to defer capital gains through a 1031 like-kind exchange.
A 1031 exchange allows you to sell a qualifying property and reinvest the proceeds into a “like-kind” replacement property within strict time limits (45 days to identify, 180 days to close), deferring all capital gains tax. The OBBBA preserved 1031 exchanges — there was no change to these rules.
Key considerations for California sellers:
- California follows federal 1031 rules, but if you exchange a California property for one in another state, California may “claw back” deferred gains when the replacement property is eventually sold
- The exchange must be facilitated by a Qualified Intermediary — you cannot touch the proceeds
- Both the relinquished and replacement properties must be held for investment or business use
For high-value investment properties, a Deferred Sales Trust may offer additional flexibility beyond a traditional 1031 exchange.
Proposition 19 and Selling Inherited Property
If you inherited a California property from a parent or grandparent, Proposition 19 (effective February 2021) significantly affects your tax calculation on sale. Under Prop 19:
- You receive a stepped-up basis for federal and California income tax purposes (your basis is the property’s fair market value at the date of death — not the original purchase price)
- However, the property is reassessed to current market value for property tax purposes unless you use it as your primary residence (and even then, the reassessment exempts only the first $1 million of value above the assessed value)
This means selling an inherited property often produces minimal capital gains tax (due to the stepped-up basis) but may have already triggered higher property taxes during the period you held it. Understanding both the income tax and property tax implications is essential.
See our article on estate tax tips for Californians for more on inherited property planning.
Timing Your Sale for Tax Efficiency
The timing of your home sale can significantly affect your tax liability:
- Sell in a low-income year: If you’re retiring, between jobs, or expect lower income this year, the gain may fall into a lower bracket
- Complete the 2-year use test: If you’re close to 2 years of primary residence use, waiting a few months can make the difference between a full exclusion and partial or no exclusion
- Coordinate with other gains and losses: Capital losses from stock sales or other investments offset home sale gains — harvest losses strategically
- Consider installment sales: Spreading the gain over multiple years through a structured installment sale can keep you in lower brackets and reduce NIIT exposure
Let Us Help You Plan Your Home Sale
Selling a home in California is one of the largest financial transactions most people ever make — and the tax consequences can range from zero (full exclusion) to hundreds of thousands of dollars. At The Law Office of Pietro Canestrelli, we help homeowners across Temecula, San Diego, Riverside, San Bernardino, and throughout California plan their sales for maximum tax efficiency.
Planning to sell your home? Contact our office before you list. A pre-sale tax consultation can save you far more than it costs.
