Capital Gains on a Home Sale in California: Worked Example

Key Takeaways

Long-term capital gains are taxed federally at 0, 15, or 20 percent depending on total taxable income. For 2026, the 20 percent rate starts above $613,700 for married couples filing jointly and $545,500 for single filers.

A 3.8 percent net investment income tax applies to the taxable part of a home sale gain when income exceeds $250,000 for married couples or $200,000 for single filers. The excluded part of the gain is never subject to it.

California has no special capital gains rate. Gains are taxed as ordinary income at rates up to 12.3 percent, plus 1 percent on income over $1 million.

In the example below, a $1,000,000 taxable gain produces roughly $290,000 in combined tax, about 29 percent of the gain and about 14 percent of the sale price.

The last dollars of a gain like this are taxed at roughly 35 percent combined, so every $100,000 of documented improvements saves about $35,000.

A big sale year can also raise Medicare premiums two years later, wipe out the new senior deduction, and require a California estimated tax payment in the quarter you close.

Summary: Selling a long-held California home can trigger federal capital gains tax, the 3.8 percent net investment income tax, and California tax at ordinary income rates. In this worked example for a retired San Jose couple, a $1,000,000 taxable gain produces about $290,000 in combined tax. Basis, improvements, selling costs, the exclusion, and a community property step-up can change that dramatically, and Medicare IRMAA and estimated tax rules add costs most sellers don’t see coming.

“So how much am I actually going to owe?” That’s the question behind nearly every capital gains conversation I have with longtime Silicon Valley homeowners, and most of the articles online answer it with rate tables and brackets instead of a real number. After more than 23 years and 460-plus closed sales in this market, many of them for older adults and their families, I’ve found that one honest worked example does more to settle nerves than any chart. So this article walks through a complete, realistic case for a retired San Jose couple, layer by layer: federal capital gains brackets, the 3.8 percent net investment income tax, California’s tax (which treats capital gains as ordinary income), and the costs that show up later, like higher Medicare premiums. Your numbers will be different and your CPA should run them, but you’ll come away with a realistic sense of scale. It’s part of my guide to capital gains when selling a Silicon Valley home you have owned for 30 years or more.

From my practice: A couple I helped buy a bank-owned home for $415,000 sold it with me sixteen years later for $875,000, more than double what they paid. Filing jointly and meeting the ownership and use tests, their $460,000 gain sat under the $500,000 married-couple exclusion before a single improvement was counted, so they owed no federal or California tax on the sale. That’s why I suggest sitting down with a CPA before assuming a big tax bill. You can read more stories like this in my client case studies.

The Example Couple

A retired couple in their 70s bought their Willow Glen home in 1988 for $320,000 and spent $180,000 on improvements over the years, including a kitchen remodel, a new roof, and an addition. They sell in 2026 for $2,100,000 with $100,000 in selling costs. Their other taxable income, from pensions, Social Security, and IRA withdrawals after deductions, is about $48,000, and that figure already reflects the larger share of Social Security that becomes taxable in a big-gain year. They file jointly and have lived in the home the whole time, so they easily meet the two-out-of-five-year ownership and use tests for the exclusion.

Step 1: The gain

	Amount
Sale price	$2,100,000
Selling costs	($100,000)
Amount realized	$2,000,000
Adjusted basis ($320,000 plus $180,000 of improvements)	($500,000)
Gain	$1,500,000
Home sale exclusion, married filing jointly	($500,000)
Taxable long-term gain	$1,000,000

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Step 2: Federal capital gains tax

Capital gains stack on top of ordinary income. With $48,000 of ordinary taxable income, total taxable income is $1,048,000, and the gain fills the 0, 15, and 20 percent brackets in order using the IRS 2026 inflation-adjusted thresholds.

Portion of the gain	Rate	Tax
$50,900, up to the $98,900 top of the 0 percent bracket	0%	$0
$514,800, from $98,900 to $613,700	15%	$77,220
$434,300, above $613,700	20%	$86,860
Total federal capital gains tax		$164,080

Step 3: The net investment income tax

The 3.8 percent net investment income tax applies to the smaller of net investment income or the amount by which modified adjusted gross income exceeds $250,000. The excluded $500,000 isn’t investment income, but the $1,000,000 taxable gain is. With adjusted gross income of about $1,080,000, the excess over $250,000 is $830,000, which is smaller than the $1,000,000 gain, so the tax is 3.8 percent of $830,000, or about $31,540. That $250,000 threshold has never been indexed for inflation, which is why it catches so many retirees in the one year they sell.

Step 4: California

California taxes the $1,000,000 gain as ordinary income, stacked on top of their pension and IRA income (California doesn’t tax Social Security). Using the Franchise Tax Board rate schedules, most of the gain lands in the 9.3, 10.3, and 11.3 percent brackets, and because their California taxable income tops $1 million, a small slice also picks up the extra 1 percent tax on income over $1 million. The California tax attributable to the gain comes to roughly $95,000. California follows the federal home sale exclusion, but it has no version of the 3.8 percent net investment income tax.

The total

Tax	Approximate amount
Federal capital gains	$164,080
Net investment income tax	$31,540
California	About $95,000
Total	About $290,000, or roughly 29 percent of the $1,000,000 taxable gain

That’s a big number, but notice it’s about 14 percent of the $2,100,000 sale price, and many of the older adults I work with expected far worse. It’s also worth knowing the difference between that 29 percent average and the marginal rate. The last dollars of this couple’s gain are taxed at roughly 35 percent combined (20 percent federal, 3.8 percent net investment income tax, and 11.3 percent California), which is the rate that matters when you’re deciding whether hunting down an old contractor invoice is worth the effort. It usually is.

The Costs That Don’t Show Up in the Tax Table

The tax bill isn’t the only thing a big gain changes, and these are the ones that surprise my clients most often.

Higher Medicare premiums two years later. Medicare’s income-related surcharge, called IRMAA, looks back two years. A 2026 sale with income of about $1,080,000 puts both spouses in the top tier for 2028. At 2026 rates that means $689.90 a month each for Part B instead of the standard $202.90, plus a $91 monthly Part D surcharge each, or roughly $13,900 extra for the couple for that one year. The Social Security appeal process covers life-changing events like the death of a spouse or loss of work income, and a one-time home sale gain generally isn’t one of them.
The new senior deduction disappears. The $6,000-per-person deduction for people 65 and older, available for 2025 through 2028, phases out once modified adjusted gross income passes $150,000 for joint filers, so in a big sale year it’s gone entirely. More of their Social Security also becomes taxable, up to the 85 percent cap. Both are built into the $48,000 figure above.
Estimated tax payments. Escrow generally doesn’t withhold income tax when a California resident sells a principal residence, so the bill comes due later. The IRS lets most people avoid an underpayment penalty by paying at least what they owed the prior year, but California doesn’t allow that prior-year safe harbor once adjusted gross income reaches $1 million. For this couple, that means a California estimated payment in the quarter they close, so plan for it before the proceeds get reinvested.

What Changes the Number the Most

If your gain is well above the exclusion, these are the levers worth discussing with your CPA. I go deeper on several of them in how to reduce capital gains tax after you’ve maxed out the $500,000 exclusion.

Documented improvements. Every $100,000 of documented capital improvements reduces the gain by $100,000, worth about $35,000 in this example because those dollars come off the top at the marginal rate. Repairs and maintenance don’t count, but additions, remodels, roofs, and systems usually do. See how to rebuild your cost basis.
A step-up. If one spouse had died and the home was held as community property, the entire home’s basis could step up to its value at death, and much or all of the gain might disappear. See the community property double step-up.
Selling costs. Commission, escrow, title, and transfer taxes reduce the amount realized. Santa Clara County charges $1.10 per $1,000 of value, and some cities add their own. San Jose’s Measure E tax, for example, adds 0.75 percent on sales above a threshold that started at $2 million in 2020 and is adjusted for inflation, so check whether your price crosses it.
Timing of other income. Delaying IRA withdrawals or other income in the year of sale can keep more of the gain in lower brackets. Closing in January instead of December also moves the gain into a different tax year.
Installment sales or other deferral. Spreading the gain over several years can keep more of it in lower brackets and under the IRMAA tiers, though each approach has tradeoffs.
Holding until death. Heirs receive a stepped-up basis, which is why some families choose not to sell. See sell now or let the kids inherit.

If You’re Single or Recently Widowed

For a single filer, the same sale looks very different. The exclusion drops to $250,000, the net investment income tax threshold drops to $200,000, and California’s brackets are roughly half as wide, so about $250,000 more of the gain is taxed and more of it lands at the top rates. On these numbers that can easily add $90,000 or more to the bill. A surviving spouse who hasn’t remarried can generally still claim the full $500,000 exclusion if the home sells within two years of the spouse’s death, and in California the community property step-up may matter even more. If that’s your situation, read selling a house after a spouse dies in California before you set a listing date, because the two-year clock is easy to miss while a family is grieving.

A Few Caveats

These figures are estimates for illustration, not tax advice. Deductions, other gains and losses, depreciation recapture if part of the home was ever rented or used as a home office, the phaseout of certain deductions, and many other details affect the real result. California’s brackets are indexed each year, and there are proposals in Congress to change the home sale exclusion, which I track in my update on the home sale tax bills. Before you list, sit down with a CPA and run your actual numbers. If you’d like help figuring out what your home would sell for so your CPA has a real number to work with, you can book a call with me. For the full planning picture, go back to capital gains when selling a Silicon Valley home you have owned for 30 years or more.

Sources and Further Reading

Frequently Asked Questions

How much capital gains tax will I pay on the sale of my house in California?

It depends on your gain after the home sale exclusion, your other income, and your filing status. In the worked example in this article, a retired married couple with a $1,000,000 taxable gain owes roughly $290,000 in combined federal capital gains tax, 3.8 percent net investment income tax, and California income tax. That’s about 29 percent of the taxable gain and about 14 percent of their $2,100,000 sale price.

Does California have a lower capital gains rate?

No. California has no special capital gains rate. Gains are taxed as ordinary income at rates up to 12.3 percent, plus an additional 1 percent on taxable income over $1 million, for a top rate of 13.3 percent. California does follow the federal home sale exclusion, and it has no version of the 3.8 percent net investment income tax.

What are the 2026 federal capital gains brackets?

For married couples filing jointly, long-term gains are taxed at 0 percent up to $98,900 of taxable income, 15 percent up to $613,700, and 20 percent above that. For single filers, the 0 percent rate applies up to $49,450 and the 20 percent rate starts above $545,500. Your gain stacks on top of your ordinary income to determine which brackets it falls into.

Does the 3.8 percent net investment income tax apply to a home sale?

It applies to the taxable portion of the gain, not the excluded portion, when modified adjusted gross income exceeds $250,000 for married couples filing jointly or $200,000 for single filers. The tax is 3.8 percent of the smaller of your net investment income or the amount your income exceeds the threshold. Those thresholds are not indexed for inflation.

How much of my home sale gain is tax-free?

If you owned and lived in the home as your main residence for at least two of the five years before the sale, you can generally exclude up to $250,000 of gain as a single filer or $500,000 as a married couple filing jointly. Those amounts were set in 1997 and have never been adjusted for inflation, which is why longtime Silicon Valley owners often have gain above the exclusion. In The 2027 Best Move Report, I pull together NAR data showing 62% of California homeowners already have gains above the $250,000 line.

Can a surviving spouse still use the $500,000 exclusion?

Yes, in many cases. A surviving spouse who hasn’t remarried can generally claim the full $500,000 exclusion if the home is sold within two years of the spouse’s death and the couple met the ownership and use tests. In California, a home held as community property may also get a full step-up in basis at the first spouse’s death, which can erase much or all of the gain.

Will selling my house raise my Medicare premiums?

It can. Medicare’s income-related monthly adjustment amount, or IRMAA, is based on your modified adjusted gross income from two years earlier, so a large taxable gain in 2026 can raise your Part B and Part D premiums in 2028. At 2026 rates, a married couple with income of $750,000 or more pays $689.90 a month each for Part B instead of the standard $202.90, plus a $91 monthly Part D surcharge each.

Do I need to make estimated tax payments after selling my house?

Usually, yes, if you have a large taxable gain. Escrow generally doesn’t withhold income tax on a California resident’s sale of a principal residence, so the tax is due through estimated payments or with your return. California doesn’t allow taxpayers with $1 million or more of adjusted gross income to rely on the prior-year safe harbor, so high-gain sellers should plan a California estimated payment in the quarter they close.

How can I reduce capital gains tax on my home sale?

Document every capital improvement, include all selling costs, make sure you qualify for the full exclusion, manage the timing of other income such as IRA withdrawals, and ask a CPA about deferral strategies like a structured installment sale. For married couples in California, a community property step-up at the first spouse’s death can eliminate much of the gain, which is why some families decide to hold rather than sell.

Is the $500,000 home sale exclusion going to increase?

Not yet. As of October 2026, the exclusion is still $250,000 for single filers and $500,000 for married couples. The More Homes on the Market Act would roughly double those amounts and index them to inflation, and the No Tax on Home Sales Act would eliminate federal tax on primary residence gains, but neither has become law. Even if federal law changes, California would not automatically follow.

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Capital Gains Tax on a Home Sale in California: How Much You’ll Really Owe

Key Takeaways