Selling real estate can bring major financial gains—but it can also trigger hefty capital gains taxes if you’re not careful. For many San Diego homeowners and real estate investors, capital gains taxes are one of the biggest financial hurdles when transferring or selling property. Fortunately, with smart estate planning and the right tax strategies, you can legally reduce or even eliminate your tax bill.
At Allenby Law, we help clients take a proactive approach to minimize taxes and protect their real estate wealth. In this blog, we’ll break down how capital gains taxes work and share proven strategies to help you keep more of your hard-earned property profits.
What Are Capital Gains Taxes on Real Estate?
Capital gains are the profits made when you sell an asset—like a home, rental property, or land—for more than what you paid for it. The capital gains tax is the tax levied on those profits.
There are two types of capital gains:
- Short-term capital gains apply if the asset was held for less than one year and are taxed as ordinary income.
- Long-term capital gains apply if the asset was held for more than a year and are typically taxed at 0%, 15%, or 20%, depending on your income bracket.
When it comes to real estate, the tax calculation can become more complex due to depreciation, exclusions, and various deductions. That’s why planning ahead is so crucial.
1. Use the Primary Residence Exclusion
If the property you’re selling is your primary residence, you may qualify for the Section 121 Exclusion, which allows you to exclude:
- Up to $250,000 of capital gains (if single)
- Or $500,000 (if married filing jointly)
To qualify, you must:
- Have owned the home for at least 2 years
- Have lived in it as your primary residence for at least 2 of the last 5 years before the sale
This is one of the most effective and accessible ways to avoid capital gains taxes for homeowners. Many San Diego families have used this exclusion when downsizing, relocating, or transitioning into retirement.
2. Consider a 1031 Exchange for Investment Property
If you’re selling investment or rental property, you likely won’t qualify for the primary residence exclusion—but there’s another tool you can use: the 1031 exchange.
A 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds from the sale into a “like-kind” property within a specified timeframe.
To qualify, you must:
- Use both properties for business or investment purposes
- Identify a replacement property within 45 days
- Complete the purchase of the replacement property within 180 days
While this doesn’t eliminate taxes, it defers them, allowing your capital to continue working for you. It’s an especially powerful strategy for real estate investors looking to upgrade or diversify their portfolios without taking a tax hit.
3. Inherit Instead of Gifting During Life
Gifting appreciated real estate to children or loved ones during your lifetime might seem like a generous idea—but it can come with an unintended tax consequence. When you gift a property during your lifetime, the recipient inherits your original cost basis.
This means your child or heir could be on the hook for a large capital gains tax bill if they decide to sell.
But if they inherit the property after your death, the cost basis is “stepped up” to the fair market value on the date of your passing. This step-up in basis can drastically reduce or even eliminate the capital gains taxes owed when the property is sold.
This is a key reason why smart estate planning matters—how and when you transfer real estate can have a major tax impact.
4. Account for Capital Improvements
When calculating your capital gains, the IRS allows you to add the cost of capital improvements to your property’s original purchase price, increasing your cost basis and reducing your taxable gain.
Capital improvements include:
- Room additions
- New roofs
- Upgraded HVAC systems
- Renovations that add value or extend the life of the property
Make sure you document and save receipts for all major improvements. These costs can help reduce your capital gains tax when you eventually sell.
5. Offset Gains with Capital Losses
If you’ve sold other assets at a loss—such as stocks, bonds, or even another piece of real estate—you can use those capital losses to offset your capital gains.
This process, known as tax-loss harvesting, helps reduce your overall taxable gain. If your losses exceed your gains, you can deduct up to $3,000 per year in capital losses against your ordinary income, and carry the remainder forward into future tax years.
An experienced estate planning and tax advisor can help coordinate these strategies for maximum efficiency.
6. Be Mindful of Depreciation Recapture
If you’ve claimed depreciation deductions on a rental or investment property over the years, you may face depreciation recapture when you sell.
Depreciation recapture means that the IRS requires you to pay a flat 25% tax rate on the depreciation amount you claimed during ownership. This applies even if the property has appreciated very little overall.
The good news is that proper planning—including 1031 exchanges or holding the property until death—can help avoid or minimize this recapture tax.
7. Charitable Remainder Trusts (CRTs)
For individuals with highly appreciated real estate who also have charitable goals, a Charitable Remainder Trust (CRT) can offer both tax savings and legacy planning.
With a CRT, you transfer the property into the trust, sell it tax-free, and receive an income stream for life (or a set term). After the term ends, the remaining value goes to a charity of your choice.
This strategy removes the asset from your estate, reduces capital gains exposure, and supports a cause you care about—all while providing financial benefits during your lifetime.
Real Estate in San Diego: Why Planning Ahead Matters
San Diego real estate is one of the most valuable assets you can own. Over time, appreciation in property values can lead to significant capital gains—and, without proper planning, significant tax exposure.
Whether you’re looking to sell your primary residence, cash out on an investment property, or pass down real estate to your heirs, each decision has long-term tax consequences. The earlier you begin planning, the more options and flexibility you’ll have.
From taking advantage of exclusions and deferrals to preserving step-up in basis benefits, your estate plan can be a powerful tool to protect your wealth.
How we can help
At Allenby Law, we simplify estate planning for San Diego homeowners, investors, and families. We take a smart, proactive approach to minimize taxes, preserve wealth, and ensure your property is transferred in the most efficient way possible.
Whether you’re planning to sell your home, pass on investment properties, or create a tax-smart legacy for your loved ones, we’re here to help. Our team understands the complex interplay of real estate, capital gains tax law, and estate planning strategy—and we’ll walk you through every step with clarity and confidence.
Reach out to Allenby Law today to explore your options and start building a plan that protects your future.
