Is Capital Gains Tax Keeping You Stuck?
Here's What You Can Do.
Across California, many longtime homeowners share a common challenge: their homes have appreciated dramatically in value—often building $1 million or more in equity. While that sounds like a win, selling can feel daunting once you factor in the capital gains tax burden.
For many families, that tax bill has become a barrier, making it harder to downsize, relocate, or unlock equity to support retirement or new investments.
Understanding the Capital Gains Hurdle:
When you sell your primary residence, the IRS allows certain exclusions—$250,000 for individuals and $500,000 for married couples. But in high-value markets like Northern California, appreciation often far exceeds those limits.
The result? Homeowners can face six-figure tax bills, shrinking the funds available for their next chapter—whether that’s retirement, reinvestment, or relocation.
Step-Up in Basis:
In addition when a spouse dies, the surviving spouse often benefits from a tax provision known as the "step-up in basis."
This rule can significantly reduce or even eliminate capital gains taxes if the surviving spouse later sells inherited assets, such as a home or investments. The concept of "step-up in basis" is important for established sellers and their heirs.
The property's tax basis is typically adjusted to its current market value, potentially reducing capital gains taxes if they or their heirs sell.
Proposition 19:
However,
Proposition 19, effective April 1, 2021, offers some relief by allowing eligible homeowners aged 55 and older, severely disabled individuals, or wildfire victims to transfer their existing property tax base to a replacement primary residence anywhere in California. This means seniors can move without facing a large property tax increase.
A "1031- Like" Approach for Primary Residences:
The 1031 Exchange has long been a tool for investors to defer capital gains on rental or investment properties. But what about homeowners selling their primary residence?
For decades, tax and legal professionals have implemented strategies designed to:
- Defer capital gains when selling a residence with substantial equity
- Preserve wealth by reinvesting proceeds into institutional-grade opportunities
- Provide flexibility to later move funds into income-producing assets, such as a Delaware Statutory Trust (DST) or 1031 Exchange
- Allow funds to grow without being diminished by immediate taxation
Why Wealth Preservation Matters:
While this type of planning was once seen as the domain of high-net-worth individuals, today many everyday homeowners find themselves in similar situations.
- Security: Proceeds can be directed into investment vehicles that prioritize stability and long-term growth
- Flexibility: Homeowners maintain the ability to adapt their reinvestment strategies over time
- Generational Impact: Preserved equity supports estate planning and can benefit future generations
Key Takeaways for Homeowners:
- If your home has appreciated well beyond the IRS exclusions, traditional protections may not be enough to shield your equity.
- There are legitimate, time-tested strategies available to defer capital gains on primary residences.
- These options are not reserved for the ultra-wealthy—many homeowners in California are now eligible to benefit from them.
Considering Your Next Move?
If you’re thinking about downsizing, relocating, or are concerned about potential tax implications, it may be time to explore these strategies.
Consulting with a qualified tax or legal professional can help you determine whether this approach makes sense for your unique situation—and ensure you keep more of the wealth you’ve worked so hard to build.
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