La Jolla · Seller guides

Selling your La Jolla home: capital gains tax and the $250,000 / $500,000 rule, explained

Short answer: If you sell your main home and qualify, the IRS lets you leave out up to $250,000 of profit, or $500,000 for a married couple filing together. To qualify, you generally need to have owned the home and lived in it for at least two of the five years before the sale. Profit above that amount is usually taxable, and California taxes it like regular income.

I'm Weston Clark, a real estate agent with Compass in La Jolla and coastal San Diego. Many of the owners I meet bought their homes years ago, so the profit on a sale can be large, and the first question is often "how much of this goes to taxes?" Here's how the main rule works, in plain words. I'm not a tax professional, and this isn't tax advice. Before you sell, run your own numbers with a CPA or tax advisor, and I'm happy to point you to a few local ones.

The main rule, in the IRS's own words

The IRS puts it this way: "If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse."

In everyday words: "capital gain" just means your profit. "Exclude" means that part of the profit isn't counted as income, so you don't pay federal income tax on it. It only works for your main home, the one you actually live in, not a rental or a vacation house.

Do you qualify? The two-out-of-five-year rule

The IRS says you generally need to pass two tests: "If you or your spouse owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of the sale, you meet the ownership test. If you and your spouse used the home as a residence for at least 24 months (2 years) of the previous 5 years, you meet the use test."

Put simply:

You owned it for at least two of the last five years.
You lived in it as your main home for at least two of the last five years.
The two years don't have to be in a row, and the owning years and the living years don't have to be the same ones.
If you're married and filing together, only one of you needs to meet the owning test, but each of you needs to meet the living test.
Generally, you can't use this break if you already used it on another home sale in the two years before.

There are exceptions, including a smaller, partial break for some people who have to move early because of a job change, health or other unexpected events, and special timing rules for military and Foreign Service families. IRS Publication 523 covers them.

How profit is figured (it's not the sale price)

This is where people are often pleasantly surprised. The IRS figures your profit as the amount you get from the sale minus your "adjusted basis." That's tax language for roughly what you paid for the home, plus the cost of lasting improvements you made over the years, like an addition, a new roof or a remodeled kitchen. Selling costs, like commissions and escrow fees, also come off the sale side.

Here's a simple example, just to show the math: say a couple bought for $900,000, spent $300,000 on a remodel, and sells for $2,500,000 with $125,000 in selling costs. Their profit is about $2,500,000 − $125,000 − $900,000 − $300,000 = $1,175,000. If they qualify for the $500,000 break, about $675,000 would still be taxable. Your own numbers will be different, so treat this only as a way to see how the pieces fit.

That's why I tell owners to dig up receipts for big projects before we list. Everyday repairs and upkeep usually don't count, but lasting improvements usually do. My seller net sheet and cost to sell guide help you see the selling-cost side.

California's part

California's tax agency, the FTB, says: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." In plain words, any profit that's taxable is taxed by the state at the same rate as your regular income, which can be a big number on a large coastal sale.

You may also see a form called FTB Form 593 in escrow. California asks escrow to hold back part of the sale price for state taxes on many sales. The usual amount is "3 1/3% (.0333) of the sales price." A home that qualifies as your main home under the same two-out-of-five-year rule can usually be marked as exempt on that form, so nothing is held back. Your escrow officer will walk you through it. My escrow guide explains the rest of the process.

Situations that change the picture

A spouse passed away. IRS Publication 523 says a surviving spouse who hasn't remarried may still be able to use the $500,000 amount if the home is sold within two years of the spouse's death. The tax value of the home can also change at a death, which can lower the taxable profit.
You inherited the home. Different rules apply. See my guides to selling an inherited home, trust sales and probate.
It was a rental or a second home. The main-home break may not cover it, or may cover only part of it. Some investors look at a 1031 exchange instead. See my 1031 exchange guide and second home guide.
You're planning a move. Timing can matter if you're close to the two-year mark. See my downsizing guide and rent-back guide if you need extra time in the home after closing.

Is Congress changing the limits?

The $250,000 and $500,000 amounts have been the same for a long time, and there are bills in Congress that would raise or remove them. As of November 4, 2026, none of them has become law, so the rules above are the ones that apply today. If that changes, I'll update this page.

For more on selling, see my guides to property taxes and closing costs. You'll find short answers on my quick answers page and all my guides on the guides page.

Common questions

How much profit can I make on my home before I pay tax?

If the home is your main home and you qualify, the IRS lets you leave out up to $250,000 of profit from your income, or up to $500,000 if you're married and file a joint return. Profit above that amount is generally taxable.

What are the rules to qualify?

In general, you need to have owned the home for at least two of the five years before the sale, and lived in it as your main home for at least two of those five years. The two years don't have to be in a row, and they don't have to be the same two years.

Is profit the same as the sale price?

No. Roughly, your profit is what you get from the sale after selling costs, minus what you paid for the home plus the cost of lasting improvements you made. That's why keeping receipts for big projects can matter.

What if my spouse passed away?

IRS Publication 523 says a surviving spouse who hasn't remarried may still be able to use the $500,000 amount if the home is sold within two years of the spouse's death and the other rules are met. A tax professional can confirm this for your situation.

Does California tax the profit too?

California's tax agency, the FTB, says: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." In plain words, any taxable profit is taxed by the state at your regular income tax rate.

Is Congress changing the $250,000 and $500,000 limits?

There are bills in Congress that would raise or remove the limits, but as of November 4, 2026, none has become law. The IRS rules on this page are the ones in effect today.

Sources: IRS, Topic no. 701, Sale of your home; IRS Publication 523, Selling Your Home; California FTB, Capital gains and losses; California FTB, 2026 Form 593 instructions; Congress.gov, H.R. 4327 status. Checked November 4, 2026. This page is general information, not tax or legal advice. Talk to a CPA or tax advisor about your own sale.

Questions about a home you're buying or selling?

Send me a note and I'll help you think through the timing of a sale, run a rough net sheet with you, and point you to local tax pros. Or call or text (858) 997-8998.