Blog > The home-sale tax exclusion for longtime Silicon Valley owners
property nerd guide · sellers
If you've owned your Silicon Valley home for decades, your gain may be well beyond the federal home-sale exclusion. Here's how the $250,000 and $500,000 exclusion works, how improvements and inherited basis change the math, and what to bring to your CPA.
By the Property Nerds® of the Boyenga Team at Compass · NextGenAgents™
single filers
married filing jointly
ownership test
use test
the short version
Why this matters more for long-time owners
Under Section 121 of the tax code, you can exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 if you're married and file jointly. For a home bought decades ago, the gain can be much larger.
Your gain isn't simply the sale price minus what you paid. It's your amount realized (the sale price minus selling costs such as commissions) minus your adjusted basis (what you paid plus qualifying improvements, with some other adjustments). That's why records matter so much. Every documented improvement can lower the gain you report.
We're not tax advisors, and this isn't tax advice. But we've worked with long-time owners, trustees and families across Silicon Valley since 1996, and starting this conversation early with a CPA makes the timing decisions much easier.
the rules
The two tests, plus a few fine points
Ownership test
You owned the home for at least 24 months during the five years before the sale. For married couples filing jointly, only one spouse needs to meet this.
Use test
You lived in the home as your main home for at least 24 months in that same five-year period. The months don't have to be consecutive. For the full $500,000, each spouse must meet this test.
- Look-back. Generally, you can't have used the exclusion on another home sold in the two years before this sale.
- Surviving spouses. You may still exclude up to $500,000 if you sell within two years of your spouse's death, haven't remarried, and meet the other requirements.
- Partial exclusion. If you don't meet the tests because you moved for work, health or an unforeseeable event, you may qualify for a reduced exclusion.
- Rental or business use. Gain from depreciation claimed after May 6, 1997 can't be excluded, and some periods of rental use after 2008 can reduce the exclusion.
worked example
How a long-held home's gain adds up
Here's a made-up example for a married couple filing jointly who bought decades ago.
| Sale price | $3,000,000 |
| Selling costs, including a negotiable commission (placeholder) | −$150,000 |
| Amount realized | $2,850,000 |
| Original purchase price | $400,000 |
| Documented capital improvements | +$200,000 |
| Adjusted basis | $600,000 |
| Gain ($2,850,000 − $600,000) | $2,250,000 |
| Exclusion (married filing jointly) | −$500,000 |
| Gain that may be taxable | $1,750,000 |
Illustration only, with round made-up numbers. It isn't a tax calculation. Federal and California taxes on any remaining gain depend on your full situation, so ask your CPA.
improvements vs. repairs
What raises your basis
According to the IRS, improvements that add value, extend the home's life or adapt it to new uses generally increase your basis. Routine repairs and maintenance generally don't, though repairs done as part of a larger remodel can count.
| Project | Generally raises basis? |
|---|---|
| Adding a room or addition | ✓ |
| Replacing the entire roof | ✓ |
| Installing central air conditioning | ✓ |
| Rewiring the home | ✓ |
| Paving the driveway | ✓ |
| Routine painting | — |
| Fixing a leak | — |
inherited homes
Stepped-up basis, in general terms
For inherited property, the IRS says the basis is generally the home's fair market value on the date of the owner's death. An executor who files an estate tax return can sometimes elect an alternate valuation date instead. For a home bought long ago, that "step-up" can greatly reduce the built-up gain.
California is a community property state. The IRS explains that when one spouse dies, community property generally takes a new basis equal to its full fair market value, including the surviving spouse's half, as long as at least half of the community interest is included in the deceased spouse's estate. How the home is titled matters, so this is a question for your estate attorney and CPA.
property nerd note
Because of the step-up rules, selling during your lifetime and selling after an inheritance can lead to very different tax results. We never recommend timing a sale around tax rules without your CPA and estate attorney in the room. What we can do is help you gather the paper trail and understand the market, so their advice rests on good numbers.
If you receive a Form 1099-S after the sale, the IRS says you must report the sale on your return even if none of the gain is taxable. Keep your closing statement and records of selling costs with your tax files.
nextgenagents™
How the Boyenga Team helps
Build the paper trail
We help you track down old closing documents, permits and project records, which can help your CPA document your basis.
Coordinate the advisors
Trust and estate sales are one of our specialties. We work alongside your CPA and attorney so the sale fits their plan.
Time it with data
As NextGenAgents™, we give you a clear read on value and market timing so your tax and family decisions start from real numbers.
talk to a property nerd
Start with what your home is worth today.
Your CPA will want a realistic sale price. We'll give you one, along with our approach to selling long-held homes. If you're 55 or older, also see our Prop 19 guide for the property tax side.
faq
The home-sale tax exclusion: FAQ
Can I use the exclusion more than once?
Yes, but generally not if you used it on another home sold in the two years before this sale.
Do both spouses have to qualify for the $500,000 exclusion?
Only one spouse needs to meet the ownership test, but both must meet the use test, and neither can have used the exclusion in the prior two years.
Is Prop 19 related to this exclusion?
No. Prop 19 is a California property tax rule about transferring your assessed value. The Section 121 exclusion is a federal income tax rule about your gain. You may be able to use both.
What if I moved out and rented the home?
You can still qualify if you meet the two-of-five-year tests. Gain from depreciation after May 6, 1997 can't be excluded, and some rental periods after 2008 can reduce the exclusion. Your CPA can run the numbers.
Sources: IRS Publication 523, Selling Your Home · IRS Topic No. 701, Sale of Your Home · IRS Publication 551, Basis of Assets · IRS Publication 555, Community Property · IRS Gifts and Inheritances FAQ (all at irs.gov). General information, not tax or legal advice. Talk with a CPA and estate attorney about your situation.