Selling Your Los Gatos Estate — Tax Benefits Longtime Homeowners Should Know About
If you bought your Los Gatos or Monte Sereno home in the 1990s or early 2000s, you’re sitting on a gain that most financial planners still find staggering to discuss out loud. A property purchased for $800K in 1998 may be worth $4M to $7M today. That appreciation is extraordinary — and it creates a tax situation that requires serious planning before you decide when and how to sell. Here is what you need to understand.
The Section 121 Exclusion — Your First Layer of Protection
Under federal tax law (IRC Section 121), married couples who have lived in their home as their primary residence for at least two of the last five years can exclude up to $500,000 of capital gains from federal income tax. Single filers can exclude $250,000.
For a home purchased at $900K now selling for $4.5M, that’s a $3.6M gross gain. After the $500K exclusion, you’re looking at $3.1M of taxable gain — subject to federal long-term capital gains rates (currently 20% for high earners, plus the 3.8% Net Investment Income Tax). That is still a very large tax bill. The exclusion helps, but on a $5M+ gain, it is the beginning of the conversation, not the end.
Proposition 19 — The Property Tax Transfer Every California Seller 55+ Should Know
California’s Proposition 19 (effective February 2021) allows homeowners 55 and older to transfer their property tax base year value to a replacement home anywhere in California — up to three times in your lifetime. This is a transformative benefit for longtime Los Gatos sellers.
If your current home has an assessed value of $600K on a property worth $5M, you’re paying property taxes on $600K. If you sell and buy a $2M walkable home in downtown Los Gatos, your new property tax would normally reset to a $2M assessed value. With Prop 19, you can transfer your $600K base and pay taxes on a blended value instead — potentially saving $15,000 to $25,000 per year in ongoing property taxes.
For downsizers, this benefit alone can make the financial case for moving. It also removes one of the primary reasons longtime owners have historically stayed in homes that no longer fit their lives.
The 1031 Exchange — For Investment and Rental Properties
If you hold investment property or rental property (not your primary residence), a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds into a like-kind property within strict timelines: 45 days to identify a replacement property, 180 days to close. This is a strategy worth knowing, but it applies to investment property — not your personal home.
The Installment Sale — Spreading the Gain Over Time
For sellers who don’t need all proceeds immediately, an installment sale allows you to receive payment — and recognize taxable gain — over multiple years. This can be structured to keep annual income below thresholds that trigger the highest marginal rates or the Net Investment Income Tax. It requires a willing buyer (often a developer or investor) and careful legal structuring. Not appropriate for every sale, but worth discussing with your CPA before dismissing it.
Stepped-Up Basis at Death — An Estate Planning Consideration
Under current federal law, when an asset passes to heirs at death, its cost basis is stepped up to the fair market value at the time of death. For a home purchased for $400K and now worth $6M, the heirs inherit at a $6M basis — eliminating the capital gains tax entirely if they sell shortly after inheriting.
This is not a reason to delay selling indefinitely — your life and plans matter more than a tax optimization — but it is a meaningful consideration in estate planning discussions with your attorney.
Timing the Sale — Year-End vs. Spring
Selling in the fourth quarter allows you to push the gain into the following tax year, giving you additional time to plan. Spring markets in Los Gatos are typically stronger on the demand side, but the difference in net proceeds from a well-positioned off-season sale often outweighs the timing premium. This is a conversation worth having with both your agent and your CPA before assuming spring is always the right answer.
The Right Team Makes the Difference
I am not a CPA or tax attorney, and I will tell you that directly. What I do is work closely with your financial team — coordinating on timing, structuring the sale to align with your tax planning, and making sure the real estate transaction doesn’t create surprises that your advisors didn’t anticipate. If you don’t have a CPA who specializes in high-net-worth real estate transactions, I can refer you to professionals who do this work at the level your situation requires.
Contact Annette Seaborn →
(408) 859-5881 | aseaborn@cbnorcal.com
Coldwell Banker Realty · Los Gatos, CA · DRE 01348743
