For homeowners in San Diego and Riverside counties, the 2026 tax landscape is shaping up to be one of the most important shifts in more than a decade. With several major provisions of the 2017 Tax Cuts and Jobs Act (TCJA) set to expire, many home sellers will see changes in how their sale is taxed—particularly around capital gains, exemptions, and deductions.
Whether you’re planning to sell a primary residence, an investment property, or a rental you’ve owned for years, understanding these new rules before 2026 can help you make smarter decisions and potentially save thousands. Here’s what Southern California sellers need to know and how to prepare.
The Big Picture: What Happens When TCJA Expires?
On January 1, 2026, several major tax rules revert to their pre-2018 versions unless Congress acts. While not all changes directly impact home sales, many indirectly affect net proceeds or a seller’s overall tax strategy.
For real estate sellers in San Diego and Riverside counties—where prices have climbed dramatically in the past five years—these changes may influence the ideal timing of a sale, how you document your home improvements, and how you calculate your final tax owed.
1. Potential Changes to Capital Gains Rates
Although the capital gains tax rate itself may not dramatically change in 2026, the income brackets that determine which rate you pay will shift. Because tax brackets will tighten when TCJA sunsets, many sellers may fall into higher taxable income ranges even without earning more.
This means your home sale—especially if it includes substantial appreciation—may be taxed at a higher capital gains rate simply due to bracket compression.
2. The Primary Residence Exclusion Still Exists—but It Matters More Than Ever
The beloved Section 121 exclusion—$250,000 for individuals or $500,000 for married couples filing jointly—remains intact. Sellers can still exclude that portion of the gain from taxes if they lived in the home for two out of the past five years.
But here’s the issue: home prices in San Diego and Riverside have surged far beyond the exclusion cap, especially for long-term homeowners. Many sellers now exceed the exemption by hundreds of thousands of dollars. With bracket shifts coming in 2026, sellers may face a larger tax bill than anticipated unless they plan ahead.
3. Higher Standard Deductions Sunset Back to Lower Levels
One of the biggest changes in 2018 was the nearly doubled standard deduction. When this expires, the deduction shrinks dramatically:
- Single filers drop from roughly $14,000 back to about $8,000.
- Married couples drop from around $28,000 back to about $16,000.
For home sellers, this matters because it may shift you back into itemizing—especially if you have mortgage interest, property taxes, or charitable giving that push itemized deductions above the lower threshold.
4. Mortgage Interest Deduction Limits Change Back
Under TCJA, mortgage interest deductions apply to the first $750,000 of acquisition debt. Pre-2018 rules allowed deductions on up to $1 million.
When the older rule returns in 2026, owners with higher-value homes—more common in San Diego—may see larger allowable deductions again. While this does not directly affect gains on a sale, it does affect your overall tax picture and planning strategy.
5. Depreciation Recapture Remains—and It’s Still a Big Factor for Investors
For anyone selling a rental or investment property, depreciation recapture remains one of the most misunderstood tax obligations. When you sell, the IRS “recaptures” the depreciation you claimed (or could have claimed) over the years at a rate up to 25%.
This rule is not changing in 2026, but with bracket adjustments and other shifts, the total tax burden on an investment sale may still increase—especially if you’ve owned the property for a long time or inherited it under stepped-up basis rules.
6. State Taxes: California Layers Its Own Rules on Top
California tax law does not follow federal sunset rules, which means:
- California’s capital gains are taxed as regular income.
- There is no special lower capital gains rate.
- High-income sellers in San Diego and Riverside may pay top brackets at the state level regardless of federal changes.
For many sellers, the combined effect of California income tax + federal capital gains tax means careful timing is essential. Waiting until after 2026 may increase your total tax liability.
7. What Sellers Should Do Now to Prepare
If you plan to sell between now and 2026, the best strategy is preparation. Here’s how to get started:
- Document every improvement. Keep receipts, contracts, and invoices—these increase your cost basis and reduce taxable gain.
- Know your estimated net gain. A real estate agent can help you determine your market value; a tax professional can calculate your potential tax bill.
- Consider selling before 2026. If your appreciation far exceeds the exclusion, selling sooner may lock in lower brackets.
- Look into 1031 exchanges for investment property. Exchanges allow investors to defer capital gains entirely when done correctly.
- Create a pre-sale tax strategy. Sellers with significant equity may need multi-year planning to reduce their tax burden.
Timing Is Everything—Especially in High-Appreciation Markets
San Diego and Riverside counties have seen some of the strongest appreciation in the state, meaning long-term homeowners often sit on substantial gains. With 2026 approaching, the timing of your sale could significantly affect your after-tax proceeds.
If you’re unsure how the changes will impact you, it’s wise to connect early with both a real estate professional and a tax advisor. A coordinated plan may help you retain more of your equity, avoid unexpected tax bills, and take full advantage of current rules before they shift.
As we move closer to 2026, staying informed—and preparing early—will be key for homeowners looking to make the most of their sale in Southern California’s evolving real estate landscape.
