Am I Saving Enough #3: Capital Gains, Explained

A reader inherited her late father's Costco stock and wants to use it for a down payment. She's worried about a surprise tax bill.

Key Takeaways

• There’s no “buying a house” exemption for investment accounts. Using investment proceeds for a down payment doesn’t make the sale tax-free.

• Inherited investments get a step-up in basis and automatic long-term treatment. Your cost basis resets to the fair market value on the date of death, and you qualify for the preferential long-term capital gains rate even if you sell tomorrow.

• Don’t forget your state. California (and plenty of other states) tax capital gains as ordinary income with no preferential rate.

Reader question lightly edited for length and clarity.

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“Hi. I don’t really know where to start with this. My dad passed away in October 2023. He worked at Costco for a really long time and apparently had a bunch of company stock through some kind of employee program. I inherited the account and I’ve been kind of ignoring it because it makes me sad and I don’t really understand it. I logged in recently and it looks like there are 200 shares and it’s worth almost $200,000 right now. My husband and I are looking at houses, our budget is around $800,000, and we want to use this for the down payment. Someone mentioned I might have to pay taxes when I sell it, which I did not know. Is there any way around that? Like, if I’m using the money to buy a house, does it still count? I just don’t want a surprise. — Cass”

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Cass, first of all: I’m sorry about your dad. Second: I’m really glad you asked this question before you sold anything because this stuff is ultra confusing.

To answer your most pressing question: no, there is no “buying a house” exemption for investment accounts. Using the money for a down payment does not make it tax-free. That particular loophole doesn’t exist. There’s a lot of nonsense being spewed online by people trying to sell you stuff with too-good-to-be-true tax hacks that don’t exist.

The bottom line here: If you sell those 200 shares of Costco stock and use the proceeds for a down payment, you will owe taxes, but a lot less than you probably think. You’ve landed in one of the more genuinely favorable scenarios the tax code has to offer, largely because your dad was a patient man who worked at a great company for a long time and didn’t touch his stock. Let me show you why this is mostly good news.

What your dad was doing

An employee stock purchase plan, or ESPP, is one of the best benefits a company can offer. The mechanics are simple: the company lets employees buy company stock at a discount, typically 15% below market price. You authorize a paycheck deduction each period, and at the end of the purchase window, that money buys shares at the lower price.

Your dad did this at Costco, probably from the late 90s onward, when the stock was a fraction of what it is today. He kept buying, and he held. Costco went from a scrappy warehouse chain famous for $1.50 hot dogs and bulk toilet paper to one of the most valuable companies in America. He held it for decades, and now it’s worth a lot of money, which is your problem to deal with…in the best possible sense.

The step-up in basis: a quick recap

I covered this in detail back in March, so I won’t rehash the whole thing here (footnote: But you should really go back and read it!). Short version: When you inherit an investment account, the IRS resets your cost basis to the fair market value of the assets on the date of death. Quick review of cost basis: It’s what you paid for the stock to use as a benchmark for how much gain you may have when you sell.

Your dad’s original basis was whatever he actually paid for those shares in the 90s, probably something like $10 to $20 a share in today’s terms (Costco’s stock has split since then, meaning each original share was divided into multiple shares. The total value stayed the same at the moment of the split, but the per-share price dropped proportionally. That’s why a price paid in the 90s looks small in “today’s terms.”). That number is now completely irrelevant to you. Costco closed at approximately $553 a share on October 20, 2023. That is your new basis. It’s what you “paid,” even though you don’t actually have to buy anything because your wonderful father left this for you. All the appreciation your dad accumulated over decades of working at that warehouse are gone from your taxable equation. Not your problem.

This is one of the kindest things the tax code does for anyone. It doesn’t do it often, so enjoy it.

Capital gains

A capital gain is the profit you make when you sell something for more than you paid for it. Stocks, real estate, a first-edition Beanie Baby you forgot was in a shoebox: same principle. Your basis is what you “paid.” Sale price minus basis equals your gain. That gain is taxable income.

How much tax you owe depends on two things: how long you held the asset, and how much money you make from your salary or other income.

Short-term capital gains, on assets held one year or less, are taxed at your ordinary income rate, the same rate as your salary. This is the bad rate. You want to avoid this one if you can by holding on to things for more than a year.

Long-term capital gains, on assets held more than a year, get preferential federal rates: 0%, 15%, or 20%, depending on your income. This is the good rate.

In your case, you have inherited assets which are automatically treated as long-term, regardless of how long you’ve actually held them. You could log into that account tomorrow, sell everything, and still qualify for the long-term rate. Congress built this in alongside the step-up rules. It is one of the rare moments where inheriting something is unambiguously better, tax-wise, than receiving it any other way.

Where you land federally

You and your husband earn $185,000 combined. The confirmed 2025 long-term capital gains brackets for married couples filing jointly:

• 0%: up to $94,050 in taxable income

• 15%: $94,050 to $583,750

• 20%: above that

At $185,000, you’re solidly in the 15% bracket.

There’s also a 3.8% surtax called the net investment income tax, or NIIT, which applies to couples with modified adjusted gross income above $250,000. You’re comfortably under that threshold. You don’t even need to think about it.

Now, California

If that wasn’t confusing enough, we have state taxes to handle. And you’re in my beautiful home state of California, one of the greatest places on earth to live! With one of the most annoyingly complex tax codes.

California absolutely recognizes the step-up in basis. Your state basis is the same as your federal basis: $553 a share, the fair market value of the Costco stock on October 20, 2023. You are not paying California taxes on everything your dad accumulated over 30 years. That would be monstrous, and it is not what happens.

What California does not have is a preferential rate for long-term capital gains. Federally, you’ll pay 15% because you’re a long-term holder. However, California does not care. The state taxes capital gains as ordinary income, full stop. At $185,000 in combined income, your California marginal rate is 9.3%, California doesn’t have separate capital gains rates—the gain gets taxed as ordinary income at whatever bracket it falls into. At your income level, that’s 9.3%

This is the cost of living somewhere with good produce and no winter. I happily pay it.

The math

You said the account looked like it was worth almost $200,000 when you wrote to me in February. Costco has moved a bit since then. At roughly $1,015 a share right now (when I’m writing this in early April 2026), 200 shares puts the account at about $203,000. I’ll use current prices since that’s closer to when you’ll actually sell.

• Your basis: $553 × 200 shares = $110,600

• Sale proceeds: ~$1,015 × 200 = $203,000

• Your capital gain: $92,400

• Federal tax at 15%: $13,860

• California tax at 9.3%: $8,593

• Total tax bill: ~$22,453

• What you net: $203,000 − $22,453 = ~$180,500

Now let’s talk about the house.

At an $800,000 purchase price, 20% down is $160,000. You’re clearing $180,500 after taxes, which covers it. But before you exhale completely: closing costs in California typically run 2 to 3% of the purchase price. On an $800,000 home, that’s another $16,000 to $24,000 out of pocket.

Run those numbers and you’ll see you’re close to the total down payment and other costs you’ll need to purchase the home. Not in trouble, but close. Before you sell, get a full closing cost estimate from your mortgage broker. If things are tighter than you’d like, you have options: put down slightly less than 20% and pay Private Mortgage Insurance (PMI) for a while, or look at whether you have other cash availble to cover closing costs. You’re not in a bad position. You’re in a “do the math before you pull the trigger” position.

Two things to do before you sell

First: confirm the step-up basis was formally recorded. Log in to the brokerage account and find the cost basis per share. It should reflect a figure around $553, corresponding to October 20, 2023. If it shows some much lower number from the 90s, the step-up wasn’t updated after your dad died, and you need to fix that before you sell. Call the custodian directly. This is fixable, but you want it fixed before you file your taxes, not after.

Second: work with a CPA on the California math before you finalize anything. State taxes are not a footnote here. They’re about 38% of your total bill on this transaction. A CPA who knows California can also confirm whether your specific income picture shifts any of this.

Parting Shot: Your dad saved diligently for thirty years without ever making a big deal of it. Turning that into the down payment on your home is a beautiful gift. Don’t overthink it.