Tax Strategies for the Well-Appreciated San Diego Home

The SALT cap quadrupled, the federal energy credits closed, and the capital-gains exclusion hasn't moved since 1997. A clear-eyed guide to the tax rules that matter most when your San Diego home has done very well.

San Diego has been generous to its homeowners. Hold a property here long enough and the appreciation tends to take care of itself — which is precisely when the tax code starts paying closer attention. And the code has been busy: the One Big Beautiful Bill Act of 2025 rewrote rules owners had memorized, while older provisions quietly grew more consequential as values climbed. Much of what still circulates online cites limits that no longer exist. Here is the current landscape — six areas where informed owners tend to make better decisions than hurried ones.

The SALT deduction just changed — in your favor

For seven years, the federal deduction for state and local taxes (SALT) was capped at $10,000, a figure many San Diego owners exhausted with the property tax bill alone. The 2025 law raised that cap to $40,000, and for the 2026 tax year it stands at $40,400, with 1 percent increases scheduled each year through 2029. In 2030, absent new legislation, it reverts to $10,000.

The fine print matters at higher incomes. Once modified adjusted gross income passes $505,000 — the 2026 threshold — the cap shrinks by 30 cents for every additional dollar, landing back at $10,000 once income reaches roughly $606,000. Separately, beginning in 2026, taxpayers in the top federal bracket see the value of their itemized deductions capped at 35 cents on the dollar.

Why it matters here: between a seven-figure assessment and California income tax, San Diego owners routinely pay well beyond $10,000 in state and local taxes. Many who shrugged and took the standard deduction now have a genuine reason to itemize again.

The strategic move: treat 2025 through 2029 as a window, not a fixture. Re-run the itemize-versus-standard math every year, and if your income hovers near the phase-down range, the timing of bonuses, asset sales, and retirement-plan decisions deserves a conversation with your CPA before December, not after.

Mortgage interest: the rules are now permanent

The deduction for home mortgage interest remains limited to interest on the first $750,000 of acquisition debt ($375,000 if married filing separately), and the 2025 law made that limit permanent rather than letting it lapse. Loans originated before December 16, 2017 keep their grandfathered $1 million cap. "Acquisition debt" is the operative phrase: the loan must buy, build, or substantially improve the home that secures it. A home-equity line that funds a new primary suite can qualify; the same line spent at the marina does not. One genuine addition: beginning with the 2026 tax year, qualified mortgage insurance premiums are once again treated as deductible mortgage interest.

Why it matters here: at San Diego prices, loan balances clear $750,000 without trying. Interest on the portion above the cap simply is not deductible, which changes the true after-tax cost of financing a move-up purchase.

The strategic move: keep a paper trail showing what borrowed money actually paid for, and take advice before restructuring a grandfathered pre-2018 loan. That older, higher cap is worth protecting.

The capital-gains exclusion problem, San Diego edition

Federal law allows you to exclude up to $250,000 of gain on the sale of a primary residence — $500,000 for married couples filing jointly — provided you owned and used the home for two of the last five years and have not claimed the exclusion within the previous two. Those figures were set in 1997, when the national median home price was about $129,000. They have never been adjusted for inflation.

San Diego has outgrown them. The county's median detached home sold for $1.1 million in March 2026, per the San Diego Association of REALTORS, and a National Association of REALTORS® analysis released this spring found that a majority of San Diego owner-occupied households now hold gains above the exclusion threshold — part of more than 13 million households nationwide. California honors the same exclusion but taxes any overage as ordinary income; the state has no preferential capital-gains rate.

The strategic move is unglamorous: documentation. Your taxable gain is the sale price, less selling costs, less adjusted basis — and basis includes far more than what you paid. IRS Publication 523 counts additions, kitchen modernization, new roofs, landscaping, pools, and major systems; ordinary repairs generally do not, unless performed as part of a larger remodel; and any energy credits you claimed must be subtracted from the basis of those improvements. Across twenty years of ownership, a well-kept improvement file can shelter six figures of gain. In this market, a filing cabinet is a tax strategy.

Two timing notes: a surviving spouse can still use the full $500,000 exclusion if the sale closes within two years of their spouse's death, and partial exclusions exist for certain moves driven by work, health, or unforeseen circumstances.

Prop 19: your tax base can move with you

Proposition 19 reshaped two things every longtime San Diego owner should understand.

First, the portable tax base. Homeowners who are 55 or older — as well as the severely disabled and victims of wildfire or natural disaster — can sell a primary residence and transfer its factored base year value to a replacement primary residence anywhere in California, purchased or built within two years of the sale. The benefit can be used up to three times (no limit for disaster victims), and if married, only one spouse needs to be 55. You may even buy up: if the new home costs more, the difference in market values is simply added to your transferred base. A claim must be filed within three years of the purchase to capture the full benefit.

Why it matters here: a tax base set in the 1990s is one of the most valuable assets a longtime owner holds. Prop 19 means right-sizing — the canyon-view house traded for the single-level near the grandchildren — no longer requires surrendering it.

Second, the inherited-property side — far less forgiving than it once was. The parent-child exclusion now applies only to a family home (or family farm), and only if the child moves in within one year and files for the homeowners' exemption. Even then, the shelter is capped at the home's existing taxable value plus $1,044,586 — the inflation-adjusted figure through February 2027 — with any market value beyond that added to the new assessment. Convert the house to a rental, and the protection disappears. At San Diego values, that cap binds more often than families expect.

The strategic move: model both sides before any transfer, treat the one-year move-in deadline as non-negotiable, and bring estate counsel in early.

Property taxes 101 in San Diego County

The annual bill is built from a 1 percent base rate on assessed value — Proposition 13's ceiling — plus voter-approved bonds and special assessments, including Mello-Roos charges in some newer communities. Your assessed value can rise no more than 2 percent a year while you own the home; it resets to market value only when the property changes hands or you add new construction.

Two mechanics surprise even seasoned owners. When you buy, the county issues a supplemental tax bill covering the gap between the seller's old assessment and your purchase price — it typically arrives six to twelve months after closing, and it goes to you, not your lender's impound account. And when you remodel, only the value of the new work is assessed; the rest of the house keeps its protected base. A new primary suite does not reprice the whole property.

The strategic move: reserve cash for the supplemental bill rather than meet it as a surprise, claim the $7,000 homeowners' exemption (modest, but it is a form, not a negotiation), and remodel knowing the assessor's reach stops at the addition.

Energy and improvement credits: the federal window closed

For years, federal credits softened the cost of going solar or upgrading systems. The 2025 law ended both residential programs: the 30 percent Residential Clean Energy Credit is unavailable for expenditures after December 31, 2025 — and the IRS counts an expenditure when installation is completed, not when the contract was signed — while the Energy Efficient Home Improvement Credit, worth up to $3,200 a year, ended for property placed in service after the same date.

Why it matters here: in a sun-rich market that adopted solar early, projects from 2026 forward must pencil on utility savings and resale appeal alone.

The strategic move: if you claimed these credits in earlier years, keep the records — they reduce your basis in those improvements when you eventually sell. For new projects, run the numbers on their own merits, and ask what state or utility programs currently apply; that landscape shifts more often than federal law does.

The through-line

Every rule above rewards the same habit: deciding before the deadline decides for you. The owners who fare best treat tax awareness as part of owning — not something assembled during escrow week.

If a sale, a move, or a family transfer sits anywhere on your horizon, the time to understand these rules is well before a sign goes in the yard. Dwell Group is glad to think through the real estate side with you, at whatever pace the decision deserves.

One essential note: this article is education, not tax advice. The figures reflect current law as of this writing and can change. Before acting on any of it, consult your CPA or tax professional — the right answer is always specific to you.

Dwell Group at SERHANT · Robyn Flint, DRE #02129556 · Serhant California, Inc.