Congress set the home sale exclusion at $250,000 for a single filer and $500,000 for a married couple in 1997, and never indexed it to inflation. The amounts are the same today.
A Santa Clara County household that bought a decade ago and has watched the house do what houses here have done can therefore have a taxable gain well past the exclusion, on a sale they think of as ordinary.
I'm Haiyan Fu, a Realtor® with Keller Williams Bay Area Estates. This comes up most often with owners who bought between 2014 and 2018, and it's the part of a move that people tend to discover late, when there's less that can be done about it. I'm not a CPA and none of this is tax advice, but the rules are public and worth understanding before you're three weeks from closing.
What the Exclusion Actually Requires
Under Internal Revenue Code section 121, you can exclude up to $250,000 of gain, or $500,000 on a joint return, if you owned the home and used it as your main home for at least 24 months out of the five years ending on the sale date. The 24 months don't have to be continuous, and the ownership and use periods don't have to line up with each other.
Two details that catch people, and both are worth putting to a CPA before you list rather than after:
- You generally can't use the exclusion if you excluded gain on another home sale within the two years before this one.
- On a joint return, only one spouse has to meet the ownership test, but both spouses have to meet the use test individually to get the full $500,000. Where one spouse moved out early — a separation, a job in another state — that's the sentence that decides whether the number is $500,000 or $250,000.
Where the Number Comes From
The sale side of it is straightforward, and it's the part I can speak to. Sale price minus selling expenses gives the amount realized. Amount realized minus adjusted basis gives the gain. What happens to the gain after that is your CPA's ground, not mine.
Adjusted basis starts at what you paid, and it grows with capital improvements: an addition, a new roof, new windows, HVAC, plumbing upgrades, a kitchen renovation, a deck, landscaping, a water heater. Repairs don't count — painting, fixing a leak, replacing broken hardware. The line between the two is finer than it sounds, and where a particular project falls is your CPA's call rather than mine. The part that's mine to say is that the receipts are what make the argument, and they're gone if nobody kept them.
Selling costs come off the other side. Commission and the transfer tax you pay on the sale reduce the amount realized rather than adding to basis, which reaches the same place by a different line.
A decade of improvement receipts comes off the taxable side of the sale. It's one of the least expensive things a homeowner can do about this, and it's done with a folder.
An Illustration
Assumed numbers, for the shape of it — a married couple, filing jointly, selling a home they've lived in since 2016:
Line | Amount |
|---|---|
Purchase price, 2016 | $1,350,000 |
Capital improvements over ten years | $150,000 |
Adjusted basis | $1,500,000 |
Sale price | $2,400,000 |
Selling costs (commission, transfer tax) | −$130,000 |
Amount realized | $2,270,000 |
Gain | $770,000 |
Section 121 exclusion | −$500,000 |
Taxable gain | $270,000 |
What that $270,000 actually costs depends on your income, and pricing it is your accountant's work, not mine. Two things about it are worth knowing before you get there. The federal long-term rate isn't the whole bill — there's an additional tax on investment income at higher incomes. And California conforms to the exclusion but has no preferential capital gains rate at all: the Franchise Tax Board's own wording is that capital gains are taxed as ordinary income.
Which is why the number people quote and the number they plan around are so often different ones. It's a short conversation with a CPA and worth having before the house is listed rather than after it closes.
The ADU Question, Which Is Where This Quietly Goes Wrong
If part of the property was rented — an ADU, an in-law unit, a room — or you took a home office deduction, depreciation comes back into the calculation at sale. It comes back whether or not it was ever claimed, which is the part that surprises people.
There's also a structural distinction that matters a great deal in this county, where detached ADUs have become common: rental use inside the house is treated more forgivingly than a separate structure on the same lot. A detached, rented ADU can put a slice of the gain outside the exclusion altogether.
How large a slice, and how it's allocated, is a question for a CPA, and a real one — not a formality.
Anyone who built a detached unit and has been renting it since 2019 or 2020 may want to have that conversation with their CPA well before listing rather than after.
If You Have to Move Before Two Years
A sale that fails the two-year test can still get a partial exclusion where the reason is a work-related move, health, or an unforeseen circumstance. It's prorated for the time you did qualify, and for a married couple it's calculated per spouse rather than once for the household — which is worth knowing about, because people who assume they've missed the window entirely often haven't.
Whether a particular move qualifies, and for how much, is a question to put to a CPA. For a household relocating for a job after eighteen months in a house — where the new job is at least 50 miles farther from the home than the old one, which is the IRS’s safe harbor — it can be real money.
And About the Bills You've Read About
There is genuine bipartisan interest in raising the exclusion. The More Homes on the Market Act would double it to $500,000 and $1,000,000 and index both to inflation; as of August 11, 2026 it had 151 House and 23 Senate cosponsors. Separately, in mid-August 2026 the White House’s top economic adviser discussed a cut to capital gains tax on home sales, and one idea reported alongside it would exempt home sales of $2 million or less.
None of that is law. The statute as of late September 2026 still reads $250,000 and $500,000, and neither version of the bill has passed either chamber. It’s worth watching, though it isn’t something to plan a sale around yet.
Bottom Line
The exclusion is a 1997 number applied to 2026 Santa Clara County prices, so for a lot of long-tenured owners here the question isn't whether there's a taxable gain but how large it is. The levers that exist are mostly documentary: a complete record of capital improvements, a clear-eyed look at any rental or home-office history, and a conversation with your CPA early enough that the answer can still shape the timing.
If a move is somewhere on your horizon, I'm happy to talk through what the sale side would look like — and to say plainly where my lane ends and your accountant's begins.
