Thinking about selling your East County home and worried about taxes eating into your profit? You are not alone. Between federal rules, California taxes, and local closing costs, it can feel confusing when all you want to know is what you will actually keep. In this guide, you will learn how capital gains work, what exclusions you may qualify for, and the key steps to protect your bottom line in Rancho San Diego, Jamul, El Cajon, La Mesa, and nearby communities. Let’s dive in.
Start with your potential gain
Your taxable gain starts with a simple idea: sale price minus selling costs minus your adjusted basis. Your basis is usually what you paid for the home plus qualifying improvements, minus any depreciation taken. Selling costs like commissions, escrow, title fees, and transfer taxes reduce the gain.
To get this right, track improvements and keep receipts. The IRS explains what counts toward basis and what does not in its guidance on adjustments and improvements. See the IRS overview of basis and improvements to confirm what qualifies.
The Section 121 home sale exclusion
Many East County sellers can exclude a big portion of their gain. If you owned and used the home as your main residence for at least 2 of the last 5 years, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly. You generally can use this exclusion once every two years. The IRS outlines these rules and exceptions on its sale of residence page.
If you do not meet the full 2‑of‑5 test, you might still qualify for a reduced exclusion for reasons like a job change, health, or unforeseen circumstances. Keep in mind that any depreciation taken for rental or business use after 1997 cannot be excluded. The IRS explains depreciation recapture rules in Publication 544.
Federal tax rates and add‑ons
If you owned your home for more than one year, any taxable gain is usually long term and may qualify for lower federal capital gains rates. If you owned it one year or less, it is generally taxed at ordinary income rates. High earners may also owe the 3.8% Net Investment Income Tax on taxable gains. Review IRS guidance on the Net Investment Income Tax to see if thresholds apply to you.
California tax rules for East County sellers
California does not give a special tax rate for capital gains. Any taxable gain from your home sale is taxed as ordinary income on your state return. The California Franchise Tax Board explains how the state treats capital gains as ordinary income.
Local closing costs to budget in San Diego County
San Diego County collects a documentary transfer tax when the deed is recorded. The rate is $0.55 per $500 of value, which equals $1.10 per $1,000. On a $1,000,000 sale, that is $1,100 in transfer tax. The county recorder outlines transfer tax and recording requirements on its recording and transfer tax page. Sellers typically pay this tax and other closing costs unless negotiated otherwise.
What this means for your net proceeds
- Selling costs lower your taxable gain and reduce cash at closing.
- Factor in commissions, escrow and title fees, and the county transfer tax.
- Ask escrow for an estimate early so you can plan your bottom line.
Special cases to plan for
If you rented your home or used part of it for business, you must account for depreciation recapture. That portion of gain is not covered by the home sale exclusion and can be taxed at special rates. The IRS details depreciation recapture in Publication 544.
If your property is an investment or rental, a Section 1031 exchange may let you defer gains by swapping into another investment property under strict 45‑day and 180‑day timelines with a qualified intermediary. Learn the basics and timing requirements in 1031 exchange FAQs.
If you are 55 or older and moving within California, Proposition 19 may let you transfer your current property tax base to a replacement home, subject to rules and filings. If you inherit a home, Prop 19 also changed the parent‑to‑child rules. The California State Board of Equalization explains Prop 19 portability and parent‑child requirements.
Reporting and paperwork
If you receive Form 1099‑S at closing, you may need to report the sale even if you qualify for the exclusion. When reporting is required, most sellers use Form 8949 and Schedule D with their federal return. The IRS instructions cover when and how to report a home sale.
Quick seller checklist
- Confirm you meet the 2‑of‑5 ownership and use test for the Section 121 exclusion. See the IRS sale of residence rules.
- Build your adjusted basis file: purchase documents, improvement receipts, and prior depreciation records. Review the IRS basis and improvements guidance.
- Request a net sheet from escrow including the San Diego County transfer tax. See the county recorder’s transfer tax details.
- If there was rental or business use, have your CPA calculate depreciation recapture. The IRS covers recapture in Publication 544.
- If you plan a 1031 exchange for an investment property, line up a qualified intermediary before you list.
- Ask your tax pro about NIIT thresholds and how California taxes will apply.
- Keep your sale’s closing statement and any Form 1099‑S for your records. See the IRS reporting instructions.
Ready to talk strategy for your East County sale and net proceeds? Connect with the local experts who handle this every day. Reach out to the Lyle + Grace Team to map your timing, pricing, and next steps.
FAQs
How do capital gains work on an East County primary home sale?
- If you meet the 2‑of‑5 ownership and use test, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly, with any remaining taxable gain subject to federal and California rules; see the IRS sale of residence guidance.
What transfer tax will I pay in San Diego County?
- The documentary transfer tax is $0.55 per $500 of value, which equals $1.10 per $1,000, and sellers typically pay it unless negotiated otherwise; see the county recorder’s transfer tax page.
How do past rentals affect taxes when I sell?
- Depreciation taken or allowable for rental or business use cannot be excluded and is subject to recapture, so you may owe tax on that portion even if you qualify for the home sale exclusion; see IRS Publication 544.
Can I keep my property tax base if I am 55+ and moving in California?
- Proposition 19 may allow a base‑year value transfer to a replacement home if you meet age and filing rules; see the California State Board of Equalization’s Prop 19 page.
Do I have to report my home sale to the IRS?
- If you receive Form 1099‑S or have taxable gain, you generally report the sale on Form 8949 and Schedule D; see the IRS reporting instructions for details.