Sell Now or Keep It for the Kids? The Tax Math on a Long-Held Newport Beach Home

Should a senior sell a long-held Newport Beach home or keep it for the heirs?
It depends on the tax math. Selling now can trigger capital gains above the $250,000 or $500,000 exclusion. Holding gives heirs a step-up in basis, but can cost you cash flow and them a Prop 19 reassessment.

If you bought your Newport Beach home in the 1980s or 1990s, you're probably sitting on millions of dollars of gain. That's wonderful news, and it creates a decision most sellers never face: sell now and pay the tax, or keep the home so your children inherit it with a stepped-up basis.

As a CPA, this is the conversation I have most often with longtime owners. The right answer is different for every family, but the math is not a mystery. This guide lays it out. For the practical and emotional side of selling a longtime home, see our post on selling your longtime home in Newport Beach. This post is about the numbers.

Option 1: Sell Now

When you sell your principal residence, federal law lets you exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly, if you owned and lived in the home for at least 2 of the last 5 years. Everything above that is taxable.

Here's an example. A couple bought their Corona del Mar home in 1985 for $400,000. It's worth $4,000,000 today. Ignoring improvements and selling costs for simplicity:

That estimate assumes the 20% federal long-term rate, the 3.8% net investment income tax and California's top rate of 13.3%. Your real number depends on your income, your documented improvements and your selling costs.

Before you panic at that number, raise your basis. Decades of improvements, like additions, remodels, a new roof or windows, add to your basis and reduce the gain. Our guide to the cost basis problem behind a $4M+ Newport Beach sale explains how to rebuild those records, and the tax side of selling in Newport Beach covers the exclusion rules in detail.

Option 2: Hold the Home for Your Heirs

If you keep the home until death, your heirs receive a step-up in basis to its value on the date of death. In the example above, the children could sell at $4,000,000 and owe little or no capital gains tax. That can save the family more than $1,000,000.

We cover how that works for heirs in our guide to the step-up in basis on an inherited California home. But holding has real costs:

• Your cash flow. Your wealth stays locked in the house when you may want it for care, travel or a new home.
• Property tax for your heirs. Under Prop 19, a child who inherits and doesn't move in within 1 year is reassessed to market value. On a $4,000,000 home, that can mean a property tax bill of roughly $40,000 a year or more. See our guide to the Prop 19 1-year rule for inherited homes.
• Upkeep. An older home keeps needing roofs, plumbing and maintenance while you hold it.

Check This First If You've Lost a Spouse

This is the most valuable question I ask widowed clients: how was the home titled when your spouse passed away?

If the home was held as community property, both halves likely stepped up to fair market value on the date of your spouse's death. The gain you're worried about may be far smaller than you think. In our example, if the home was worth $3,500,000 when your spouse passed and you sell today for $4,000,000, your gain could be about $500,000, not $3,600,000. The IRS explains the rule in Publication 555, Community Property.

There's a second break too. Under Internal Revenue Code Section 121(b)(4), a surviving spouse who sells within 2 years of the spouse's death, and hasn't remarried, can generally still use the full $500,000 married exclusion instead of $250,000.

If the home was held as joint tenancy, only your spouse's half stepped up. That's still a meaningful reduction, but less than community property.

Moving to Assisted Living? Your Exclusion May Survive

Many seniors worry that once they move into a care facility, they'll lose the home-sale exclusion because they no longer live in the house. There's a special rule for this. Under Section 121(d)(7), if you become physically or mentally unable to care for yourself, time spent in a state-licensed care facility, including a nursing home, can count as living in the home, as long as you owned and lived in the home for at least 1 year during the 5 years before the sale.

That can preserve your $250,000 or $500,000 exclusion even if the house sits empty or is sold years after you moved into care. Talk to your CPA before you rent the home out, because renting it can change the analysis.

Middle Paths Worth Considering

• Sell and buy smaller with Prop 19. Homeowners 55 and older can transfer their low property tax base to a replacement home anywhere in California. See who qualifies for the Prop 19 transfer and the 5 common downsizing regrets.
• Keep the home and access equity. Homeowners 62 and older may qualify for an FHA-insured reverse mortgage, which provides cash while you keep the home. It has costs and requirements, so compare it carefully with a sale.
• Don't gift the house to your children. A lifetime gift passes along your original basis and forfeits the step-up. For most families, it's the most expensive option on the list.

Questions to Answer Before You Decide

1. What is your adjusted basis, including documented improvements?
2. If you've lost a spouse, how was the home titled and what was it worth on that date?
3. Do you need the cash from the sale for the next 5 to 10 years of your life?
4. Will any of your children realistically move into the home?
5. Who has legal authority to sign if you can't, such as a trustee or an agent under a power of attorney?

If you decide to sell, our Newport Beach downsizing guide and our post on the best Orange County neighborhoods for retirement can help you plan the next chapter. If the home is in a trust, see selling a home through a trust or probate in Orange County.

Frequently Asked Questions

Should I sell my house or leave it to my kids for the step-up in basis?

It depends on the size of your gain, your cash needs and whether your children will live in the home. Holding can save heirs capital gains tax, but they may face a Prop 19 reassessment.

How much capital gains tax will I pay selling my longtime Newport Beach home?

Gain above your adjusted basis and the $250,000 or $500,000 exclusion is taxable. At top rates, federal and California tax combined can exceed 35% of the taxable gain.

Did my home's basis step up when my spouse died?

If the home was community property, both halves generally stepped up to the value on the date of death. If it was joint tenancy, only your spouse's half stepped up.

Can a widow still use the $500,000 home-sale exclusion?

Generally yes, if you sell within 2 years of your spouse's death, haven't remarried, and the ownership and use tests were met before the death.

Do I lose the home-sale exclusion if I move into assisted living?

Not necessarily. If you can no longer care for yourself and owned and lived in the home at least 1 of the past 5 years, time in a licensed care facility can count as use.

Should I give my house to my children before I die?

Usually not. A lifetime gift passes your original basis to your children, so they lose the step-up and may owe large capital gains tax when they sell.

Let's Talk Through Your Situation

I'm Dar Mardan, a CPA and REALTOR® with Vidar Group Real Estate at Real Broker. Together with my wife Vida, we help buyers and sellers across Newport Beach, Corona del Mar, Irvine and all of Orange County.

Before you list, let's run your actual basis, exclusion and sell-versus-hold numbers together. Book a complimentary strategy call or call me directly at 714-612-3870.

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