Should You Sell Your Home During Your Lifetime or Leave It to Your Children?

We get this question a lot. Someone's sitting across the table from us, they've owned their home for 20 or 30 years, it's gone up dramatically in value, and now they're trying to figure out: Do I sell it and use the money, or hold on and let the kids have it someday?

It feels like a simple question. It's not.

In California especially, the timing of this decision can mean hundreds of thousands of dollars in taxes. In either direction. So, let's walk through what you actually need to know.

If You Sell During Your Lifetime

Selling gives you direct control over the money. You can fund your retirement, make gifts to your kids now or later, invest somewhere else, or do a mix of all three. That's a real advantage, and for many people, it makes a lot of sense.

There's also a tax break most homeowners know about. If you've owned and lived in the home for at least two of the last five years, federal law lets you exclude up to $250,000 in capital gains from the sale. For married couples filing jointly, that's $500,000.

But here's the thing: Southern California home values being what they are, a lot of people have appreciation that blows right past those thresholds. If you do sell, you'll owe capital gains tax on the rest, and that's where things get more complicated.

Depending on your income, the federal rate on that gain is either 15% or 20%. Higher earners may also owe an additional 3.8% net investment income tax (NIIT) once modified adjusted gross income (MAGI) tops $200,000 (single) or $250,000 (married filing jointly).

Then there's the California state tax on top of that. California taxes capital gains as ordinary income, up to 13.3%. There's no preferential rate here.

So, if you've got a highly appreciated home and significant income, the tax hit from selling can be substantial. Not a reason to avoid selling. Just a reason to run the numbers first.

If You Hold On and Leave It to Your Kids

Here's where families may leave money on the table simply because they don't know the rules.

When your children inherit your home, they receive what's called a stepped-up cost basis. The property's cost basis resets to its fair market value at the time of your death. So, if your home is worth $900,000 when you pass, and your kids sell it shortly after for $900,000, they owe zero in capital gains tax. Doesn't matter that you paid $150,000 for it 35 years ago. That appreciation essentially becomes tax-free for them.

For families sitting on a lot of equity, this can be a significant advantage. The decades of gains disappear from a tax perspective.

But in California, the story doesn't end there.

What Prop. 19 Changed

If you've owned your home for a while, your property tax bill is probably anchored to that original purchase price thanks to Proposition 13. That's been a great deal.

The question is whether your kids can keep it.

Before 2021, the answer was often yes. Children could inherit a parent's home and keep the low assessed value regardless of how they used the property.

Proposition 19, which took effect in February 2021, changed that significantly.

Now, children can only inherit the low assessed value if they use the home as their primary residence. And even then, if the home's market value exceeds the parent's assessed value by roughly $1 million (that cap adjusts for inflation), the assessment gets partially bumped up.

If your child plans to rent it out, use it as a vacation home, or sell it? The property gets fully reassessed to the current market value. In high-cost areas of Southern California, that can mean a dramatically higher property tax bill than anything you've been paying.

That's not a reason to avoid leaving the home to your kids. But it is a reason to think about what they actually plan to do with it before you assume it's a clean win.

So, What Should You Actually Do?

In our experience as fiduciary financial advisors, the right answer is almost never obvious without looking at the full picture.

Some questions worth sitting with: How much has your home appreciated, and how does that compare to the capital gains exclusion? Do your children plan to live in the home, rent it out, or sell it? How does the home fit into your broader estate plan? Do you need the equity now, or is it better to let it grow?

There's no universal playbook here. The decisions around timing, ownership structure, and what you do with the proceeds can have lasting consequences for you and your family.

This Is the Kind of Thing We Help With

One of the reasons we added real estate services to what we offer is because of conversations exactly like this one. A traditional real estate agent is great at selling homes. But they may not be running the capital gains calculation. They're usually not thinking about how this fits your retirement income plan.

We can do that. We can help you figure out the tax impact of a sale, look at where the home fits in your estate plan, and coordinate all the moving pieces so nothing falls through the cracks.

Whether you're thinking about downsizing, dealing with an inherited property, or just trying to figure out the smartest move, we'd love to help you think it through.

Give us a call at 909-296-7977 or schedule a time at evermont.com.

Keep building your future.

This material was written in collaboration with artificial intelligence (Claude) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.