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Selling a long-held home: the gain past $500,000, and what to do with it

A house bought in 1985 and sold in 2026 in coastal California can carry a $1.5 million gain. The exclusion covers the first $500,000 for a couple. The rest is taxed, and most sellers never rebuild their basis.

One-page cheat sheet for this exact situation, plus a live Zoom walkthrough Saturday, October 10, 2026 at 10:30 AM PT / 1:30 PM ET. Nothing is sold.

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What this sale costs if nothing is planned

Home bought for $300,000 in 1985, $150,000 of improvements, sold for $2,200,000, married couple, California, 2026

Layer	Rate (source below)	Amount
Gain after $500K exclusion (about $1.2M)	15% / 20%	about $225,000
Net investment income tax	3.8%	about $46,000
California (whole taxable gain)	9.3% to 12.3%	about $130,000
Total		about $400,000

Rounded, illustrative, assumes no other income in the year of sale. See Sources and review at the bottom of the page.

The options, in plain language

Five ways this tax gets paid, spread or shrunk

Rebuild the basis. Every improvement since purchase (roof, kitchen, additions, landscaping, solar) adds to basis. Sellers routinely leave $100K to $300K of basis on the table.
Section 453 installment sale. A primary residence above the exclusion can be sold on an installment basis; the taxable slice is spread across years, keeping each under the 20% and 3.8% lines. Structured version: buyer pays cash, insurer pays you.
Widow or widower timing. A surviving spouse keeps the $500,000 exclusion for 2 years after the death, and half the house got a step-up (all of it in community-property states). Selling inside that window can erase most of the gain.
Convert to a rental first, then 1031. Rent it 1 to 2 years, then exchange. The $500K exclusion still applies to the residence gain; the exchange defers the rest. Slow, but it works.
Charitable remainder trust. Deed a share of the house to a CRT before listing. Untaxed sale of that share, income for life, deduction now.

Who this is written for: people who have owned the asset for years, often decades, and are selling once, usually around retirement. If you are buying and selling frequently, different rules (dealer status, ordinary income) apply and this page is not for you.

Six questions to bring to your CPA

What is my basis with every improvement since purchase?
Community property step-up if my spouse died, and when?
Taxable gain after the exclusion, and NIIT this year?
Installment sale across 3 years: year-one vs total tax?
Rent-then-1031: does the exclusion survive?
Do I need to make an estimated payment the quarter I close?

The deadlines that decide it

Section 121: 2 of the last 5 years as your main home.
Surviving spouse: sell within 2 years of the death for the $500K.
Installment terms: in the contract.
Rental conversion before a 1031: at least a full year of real rental use.

Common questions

Straight answers

Is the exclusion $250,000 or $500,000?

$250,000 per qualifying owner; $500,000 married filing jointly if both meet the use test.

Do I pay tax on the whole sale price?

No, on the gain: price minus basis (purchase plus improvements) minus selling costs minus the exclusion.

Can I do a 1031 on my home?

Not while it is your residence. After a genuine period as a rental, the rented portion can be exchanged.

What if I inherited half from my spouse?

That half (or all, in a community property state) got a new basis at death. Many sellers overpay by forgetting this.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Capital gains rates and brackets 2026: IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC 1(h)
Net investment income tax 3.8%: IRC 1411; thresholds $200,000 single / $250,000 MFJ, not indexed
Depreciation recapture 25% (unrecaptured 1250) and 1245: IRC 1(h)(6), IRC 1245, IRC 1250; IRS Pub. 544
Section 121 home-sale exclusion: IRC 121; IRS Pub. 523; surviving-spouse 2-year rule IRC 121(b)(4)
1031 exchange rules: IRC 1031 (real property only after TCJA 2017); Treas. Reg. 1.1031(k)-1 (45/180 days, QI); IRS Form 8824
Delaware Statutory Trust as 1031 property: IRS Rev. Rul. 2004-86
Installment sales: IRC 453; IRS Pub. 537; Form 6252; IRC 453A interest charge above $5,000,000; IRC 453(k) excludes publicly traded stock
Monetized installment sales: IRS Dirty Dozen (IR-2023-54 and later); proposed regs REG-109348-22
QSBS: IRC 1202 as amended by P.L. 119-21 (2025): $15M cap, tiered holding periods for stock issued after July 4, 2025
Charitable remainder trusts: IRC 664; Treas. Reg. 1.664; pre-arranged sale doctrine (Rev. Rul. 78-197)
Step-up in basis: IRC 1014; community property IRC 1014(b)(6)
Inherited IRA 10-year rule: IRC 401(a)(9)(H) (SECURE Act); Treas. Reg. 1.401(a)(9) final regs 2024
California treatment: Cal. Rev. & Tax. Code 17041 (rates), 18031 (1031 conformity), FTB Form 3840 (out-of-state exchange tracking); Prop 19 (Cal. Const. art. XIII A, sec. 2.1)
Purchase price allocation: IRC 1060; IRS Form 8594

Figures are 2026 federal amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 21, 2026.

Selling a long-held home: the gain past $500,000, and what to do with it

What this sale costs if nothing is planned

Five ways this tax gets paid, spread or shrunk

Six questions to bring to your CPA

The deadlines that decide it

Straight answers

Is the exclusion $250,000 or $500,000?

Do I pay tax on the whole sale price?

Can I do a 1031 on my home?

What if I inherited half from my spouse?

Sources and review

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