OCTOBER 2026 | CLIENT UPDATE

Before December 31: Year-End Tax Timing for Home Sellers

A message from the Gloria Shepard Team at Compass · Oct 1, 2026

If you've owned your San Diego home for many years, the tax side of a sale deserves as much planning as the price. And with just three months left in 2026, the calendar itself has become part of that planning.

Whether a sale closes on December 30 or January 4 can change which tax year the gain lands in. The decisions you make this fall can change how much of that gain is taxed at all. For long-time owners in communities like Santaluz, Rancho Santa Fe, La Jolla, and Del Mar, the difference can easily reach six figures.

We're not tax advisors, and this isn't tax advice. But we've guided enough clients through this to know which questions matter. Here's what we'd want you to bring to your CPA before December 31.

The Exclusion Hasn't Kept Up With San Diego

The federal home sale exclusion, Section 121 of the tax code, lets you exclude up to $250,000 of gain on your primary residence, or $500,000 for married couples filing jointly. It's one of the most valuable tax benefits a homeowner has.

The catch is that those limits were set in 1997 and have never been adjusted for inflation. In 1997, $500,000 covered nearly any home sale. Today, it covers a fraction of the gain on many long-held San Diego properties.

Consider a simple illustration. A couple bought in 2006 for $1.3 million and sells this year for $3.5 million. Their gain is roughly $2.2 million, and after the $500,000 exclusion, about $1.7 million may be taxable.

California follows the same federal cap, and taxes capital gains as ordinary income. Between federal capital gains rates, the 3.8% net investment income tax, and California's rates of up to 13.3%, the combined bill on a gain like that could exceed $500,000.

That's why planning matters. Your actual numbers depend on your purchase price, improvements, selling costs, and income, which is exactly what your CPA should model with you.

Questions to Bring to Your CPA This Fall

1. Should the sale close in December or January?
The closing date generally determines which tax year the gain falls in. If your income is unusually high this year, perhaps from a business sale or bonus, a January closing may make sense. If 2027 looks heavier, closing before December 31 may be better. Escrow timelines run 30 to 45 days, so this decision needs to be made soon.

2. Do you still meet the two-out-of-five-years rule?
To claim the full exclusion, you generally must have owned and lived in the home as your primary residence for at least two of the five years before the sale. If you've moved out, rented the home, or split time with another property, check your dates before you list.

3. Have you documented your capital improvements?
Your taxable gain is based on your purchase price plus improvements, not just what you paid. A remodeled kitchen, a new pool, solar, or landscaping can add meaningfully to your basis. Many long-time owners have lost track of these records, so start gathering receipts and permits now.

4. Can other losses offset the gain?
Capital losses from investments can generally offset gain above the exclusion. If you're selling this year, coordinate the home sale with the rest of your portfolio before December 31, not after.

5. If you're 55 or older, does Prop 19 change your plans?
If you're staying in California, Prop 19 generally lets homeowners 55 and older transfer their property tax base to a replacement home anywhere in the state, up to three times. The replacement must be bought within two years of the sale, and a more expensive home adds the difference to your base. For long-time owners with a low assessed value, this can make a move within California far more attractive.

6. Is selling now right for you at all?
For some owners, especially later in life, holding the home may be the better tax outcome. Heirs who inherit a home generally receive a stepped-up basis, which can largely erase the built-in gain. This is a family and estate-planning question as much as a real estate one, and it deserves an honest conversation.

A Word on the Headlines

You may have seen coverage of the No Tax on Home Sales Act, a House bill that would remove the dollar caps on the home sale exclusion entirely. Other proposals would raise the caps rather than eliminate them.

The bill was introduced in July 2025 and remains in committee. It would also apply only to sales after it becomes law. It's worth watching, but we wouldn't recommend building a sale strategy around legislation that may never pass.

Where We Come In

The best outcomes we see come from sellers who bring their CPA and their real estate team into the same conversation early. Your CPA models the tax picture. We help with the other half: a realistic value for your home today, a timeline that fits your tax goals, and a marketing plan built around both.

If you're thinking about selling in the next year, now is the right time to start that conversation. No obligation, just a clear look at your options while there's still time to act on them.

Warmly,

The Gloria Shepard Team | Compass