Capital Gains Tax When Selling a Parent's Home
After decades of appreciation, a family home’s sale price can create a real capital gains tax bill — but the rules change significantly depending on when the sale happens and how the home was owned.
The primary-residence exclusion, while a parent is alive
If the parent owned and lived in the home as a primary residence for at least two of the last five years, up to $250,000 of gain ($500,000 for a married couple) can generally be excluded from capital gains tax. Moving permanently into assisted living or memory care starts a clock — the residency requirement can still be met for a period after moving out, but that window eventually closes, making earlier timing decisions matter more than families expect.
The stepped-up basis, after death
If the home is instead sold after the parent’s death, heirs generally receive a “stepped-up basis” — the home’s tax basis resets to its fair market value at the date of death, which can eliminate most or all of the capital gain that built up during the parent’s lifetime. This is a major reason some families choose to hold a home rather than sell it while the parent is still alive, when the numbers support it.
How a trust changes this
A home held in a standard revocable living trust during the parent’s lifetime generally still gets the stepped-up basis at death, since the trust is treated as the parent’s own asset for tax purposes. Certain irrevocable trusts, used for Medi-Cal or estate-tax planning, can affect whether the stepped-up basis still applies — this is exactly the kind of detail that needs an elder-law or estate-planning attorney’s review of the specific trust document, not a general rule of thumb.
This is general information, not tax advice — confirm the numbers for your specific situation with a CPA before deciding when to sell.
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