When someone has owned a home for decades, the decision to sell is rarely just financial. Often it is driven by family changes, like wanting to be closer to children or new grandchildren. That emotional pull can run headfirst into a very real tax issue, especially when the home has appreciated significantly.
In this case, a couple bought a home in Santa Cruz for about $300,000 in the 1980s. Today, it is worth roughly $1.8 million. They want to move closer to family, but the capital gains tax gives them pause. That tension between lifestyle and taxes is common, and it deserves to be unpacked carefully.
Understanding the Capital Gains Impact
The first step is to be clear about what the tax bill actually looks like.
For a primary residence, the federal capital gains exclusion allows individuals to exclude up to $250,000 of gains, or $500,000 for a married couple. Assuming a $300,000 cost basis and a $1.8 million sale price, that leaves roughly $1.5 million in total gains. After applying the $500,000 exclusion, about $1 million remains subject to tax.
At the federal level, that gain is likely taxed at the 20 percent long-term capital gains rate, plus the 3.8 percent net investment income tax. Before considering state taxes, the federal bill alone approaches 25 percent. Once state taxes are included, the total tax cost can easily exceed $250,000.
That number is large enough to stop almost anyone in their tracks. But it should not be the only factor driving the decision.
When Paying the Tax May Still Make Sense
One option is the simplest. Sell the home, pay the tax, and move on.
After taxes, the couple still walks away with substantial net proceeds. That capital can be used to purchase a home closer to family, potentially in a lower cost-of-living area. It may also free up cash for travel, helping with grandchildren’s education, or simply increasing flexibility in retirement.
If the broader financial plan still works after paying the tax, it is important not to let taxes alone dictate where and how you live. Being close to family has real value that does not show up on a spreadsheet.
Looking at the Estate Planning Angle
Another way to think about this decision is through the lens of the entire family balance sheet.
If the home is not sold and instead passes to heirs, the beneficiaries receive a step-up in basis at death. That means the cost basis resets to the fair market value at that time. In this example, the $1.8 million home could pass to children with little or no capital gains tax exposure.
From a family perspective, that step-up can be worth hundreds of thousands of dollars. The tradeoff is obvious. Keeping the home preserves that tax benefit, but it does not solve the desire to relocate closer to grandchildren today.
Creative Alternatives Beyond an Immediate Sale
This is where planning becomes more nuanced.
If the couple does not need immediate liquidity, it may be possible to delay selling the home while still moving closer to family. Options might include renting near the grandchildren for a period of time, or using a home equity line of credit on the existing property to help fund a new purchase. The current home could potentially be rented out, with rental income covering ongoing costs.
In those scenarios, the primary ongoing cost becomes the interest on borrowed funds rather than a permanent tax bill. That does not make the decision right or wrong, but it reframes the question away from an all-or-nothing sale.
The key is stepping back and viewing the assets not just as individual property decisions, but as part of a larger family and estate picture. The most efficient outcome often balances current lifestyle goals with long-term tax efficiency for the next generation.
Balancing Lifestyle and Tax Efficiency
There is no single correct answer in situations like this. Sometimes paying the tax and simplifying life is the right move. Other times, retaining a highly appreciated asset provides meaningful long-term value for heirs.
What matters most is understanding the full range of options and tradeoffs, and making sure the decision aligns with both personal priorities and the broader financial plan.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on capital gains planning, housing decisions, and balancing family goals with tax strategy, listen to the full podcast episode here.