For a definite answer, you will need to consult your accountant or attorney. Also, since I practice in Massachusetts, I don’t know the California tax on capital gains. But here’s how the federal tax works: Your basis in the property is approximately $600,000, assuming you can document the improvements ($358,000 plus $250,000). Your capital gain is the difference between your sales price and your basis, or approximately $1.9 million ($2.5 million less $600,000). You and your wife together can exclude $500,000 of gain, bringing the taxable gain down to $1.4 million. In addition, if you have to pay a realtor to sell the property, his or her fee is deductible. Assuming that’s $100,000, this brings your taxable gain down to $1.3 million. Then, we have to determine your capital gains tax rate. If your taxable income is less than $445,850, it is 15 percent, resulting in a tax of $195,000. If it is greater than this threshold, the tax rate is 20 percent, resulting in a tax of $260,000. You will have to check with a California attorney or accountant to determine your state tax.