In most cities, owning a home means keeping pace with inflation. In San Francisco, it has meant something closer to compounding wealth — and returns that would be unheard of elsewhere.
Let’s face it: this kind of appreciation isn’t available everywhere. Plenty of American markets have moved sideways for a decade. San Francisco has not — over the past thirty years, residential real estate here has appreciated at roughly 7% annually, meaningfully ahead of inflation and well ahead of most U.S. metros. Long-time owners routinely sit on gains of 30–40% or more relative to recent comps.
When it comes time to sell — and if we do our job right (which we will) — you may well have a capital gains issue worth planning for.
Like most every seller, the first question is the same: how much will we sell the house for? The answer is a lot, and more — but just how much, and how much more, is something we can’t predict yet.
Then the other questions arrive. How much will I owe in taxes? How can I limit what I owe?
Combined California and federal capital gains rates typically land in the 34–37% range. And here’s a point that catches sellers off guard: even if you relocate out of state before the sale closes, you’ll still owe California’s Franchise Tax Board — because the property itself sits within the state.
The good news is that there are built-in tax benefits that lessen the blow. The work is in knowing where they are and planning ahead.
I'm not a CPA, and you should consult one. But I've worked through these questions many times — with clients, and with my own family's properties. If you need referrals to the right professionals, I'm glad to make introductions.
Back to the narrative.
If the home you’re selling is your primary residence, you may exclude pre-set amounts of gain under IRS Section 121 — and potentially significantly more once qualifying improvements are factored in. (The full guidance lives in IRS Publication 523 — worth a Google for the details.)
The headline numbers:
The IRS and California’s Franchise Tax Board both work from the same equation:
The higher your adjusted basis, the smaller your taxable gain. Which means the work you’ve done to the house over the years — if it qualifies — is doing real tax work too.
What counts toward your basis
Keep your receipts. Those records can make all the difference.
Beyond the improvements made over the years, costs incurred at the sale itself get factored in too:
For the full list, see IRS Publication 523.
Capital gains taxes on a sale are due the year after the sale closes — not the year of. That extra runway can matter for planning.
Since 1978, Proposition 13 has capped annual property tax increases at 2% over the original assessed value — not market value. The result, in a market like ours, is a tax delta that can be staggering between neighbors on the same block.
Bought in 1985 for $200K
→ annual property tax around $3,000.
Same home bought in 2024 for $2M
→ annual property tax around $25,000.
That difference is the single biggest reason long-time SF owners hesitate to sell. The home itself has done its job. Letting go of the tax basis is the real price of admission.
For homeowners 55 or older, the severely disabled, or victims of natural disaster, Proposition 19 is the unlock. It lets you transfer your low Prop 13 base to a replacement home anywhere in California — up to three times in your lifetime.
For decades, the property tax gap has frozen older homeowners in place — even when the house no longer fits their life. Prop 19 is the provision that thaws that. Downsizing, relocating, or moving closer to family no longer means trading a $4,000 tax bill for a $40,000 one.
If you’re selling a rental or investment property, the primary residence exclusion doesn’t apply. Instead, you’re looking at:
A 1031 lets you defer the entire bill by reinvesting proceeds into another investment property. Done correctly, the tax obligation rolls forward — sometimes indefinitely.
When investment property is inherited, the heir receives a step-up in basis to the current market value. Sell immediately and the capital gains liability is, effectively, zero. This is one of the most powerful provisions in the tax code — and a reason careful estate planning matters.
In 2025, the federal estate tax exemption is $13.99 million per person ($27.98 million per married couple). Estates above that face a 40% federal tax. California, importantly, has no state estate tax — which is part of what makes real estate here such a durable wealth-building tool across generations.
Proposition 19 changed the rules for parent-to-child transfers. Two conditions now apply:
A home bought in 1980 for $300,000 has a current property tax bill around $4,500/year.
The home is now worth $2.5M, but its assessed value still sits near $500,000.
Under the old rules: the child could inherit that $500,000 tax basis — even if they rented the home out.
Under Prop 19: unless the child moves in within a year, the home is reassessed at market value. The annual tax bill jumps past $30,000.
The planning implications are real. For some families, this changes the calculus on whether to hold a home for the next generation or sell during the parents’ lifetime.
Most homeowners I work with eventually deed their primary residence into a revocable trust. The reasons are straightforward:
For married couples, California’s community property rules also handle the simplest case cleanly: when one spouse dies, the surviving spouse inherits the home automatically, without probate.
We work with top estate planners, CPAs, and tax professionals across San Francisco. If you’re weighing a sale, a 1031, a move under Prop 19, or how to position a property for the next generation — I’d be glad to talk it through.
The information on this page is general in nature and reflects our working understanding as San Francisco real estate professionals. It is not legal, tax, or financial advice. Tax law and California propositions evolve; specific outcomes depend on individual circumstances. Please consult a qualified CPA, tax attorney, or estate planner before making decisions based on anything you've read here.