Selling in Los Gatos can unlock a lot of hard‑earned equity, but the tax bill does not have to surprise you. With a bit of planning, you can keep more of your proceeds and move forward with confidence. In this guide, you will learn the most valuable tax rules and practical strategies for Los Gatos sellers, plus local costs to budget and documents to gather. Let’s dive in.
Start with the Section 121 exclusion
If the home is your primary residence, you may be able to exclude up to $250,000 of gain if single or $500,000 if married filing jointly. To qualify, you generally must have owned the home and used it as your principal residence for at least 2 of the 5 years before the sale. The IRS also allows a partial exclusion for certain moves due to work, health, or unforeseen circumstances. See the worksheets and examples in IRS Publication 523.
Given Los Gatos home values, many longtime owners will still have gain above the exclusion. If so, plan early so you understand how the excess is taxed and what you can do about it.
How taxable gains are taxed
If you have gain beyond the exclusion, it is usually treated as long‑term capital gain if you owned the home for more than one year. Federal long‑term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income. High‑income taxpayers may also owe the 3.8% Net Investment Income Tax (NIIT). Review rate basics in IRS Topic No. 409 and the NIIT overview in IRS Topic No. 559.
California taxes capital gains as ordinary income. There is no special lower rate for long‑term gains at the state level, so include state tax in your estimate. See the California Franchise Tax Board’s guidance on gains and losses at the FTB capital gains page.
Boost your basis to reduce taxable gain
Your adjusted basis determines your gain. You can increase basis with documented capital improvements, certain closing costs, and selling expenses. Improvements add value or extend the home’s life, while routine repairs do not. Keep invoices, permits, and payment records. The improvement lists and worksheets in Publication 523 make this process straightforward.
Time your sale with your income
The year you recognize gain affects your tax brackets, NIIT exposure, and California tax. If you expect a lower‑income year due to retirement, sabbatical, or a business change, consider timing your closing accordingly. This kind of bracket management can reduce federal and state taxes on the taxable portion of your gain. For rate basics, revisit IRS Topic No. 409.
Options for non‑primary or mixed‑use property
If your Los Gatos property is an investment or had rental use, consider these tools to manage taxes:
Installment sale to spread the gain
With an installment sale, you receive payments over time and recognize gain as you are paid. This can keep you in lower brackets year by year, but it adds complexity, interest rules, and default risk. Review mechanics and limits in IRS Publication 537.
1031 exchange for investment property
Selling an investment property and reinvesting in other real property can defer gain if you meet strict deadlines and use a Qualified Intermediary. Identify within 45 days and close within 180 days. This does not apply to a pure primary residence. Learn the essentials in the IRS guide to like‑kind exchanges.
Opportunity Zone reinvestment
If you realize capital gains, you may defer tax by investing those gains in a Qualified Opportunity Fund within 180 days. Holding periods can unlock additional benefits. Rules are technical and time‑sensitive, so confirm current guidance in the IRS overview of Qualified Opportunity Funds.
If you rented the home at any point
Only the portion of ownership time you used the home as your principal residence may qualify for the Section 121 exclusion. Also, any depreciation you claimed for rental or business use must be “recaptured,” and that portion of gain is not eligible for the exclusion. The IRS explains allocation and recapture rules in Publication 523.
Local costs to budget in Los Gatos
Santa Clara County collects a documentary transfer tax of $0.55 per $500 of the sale price, collected at recording. Los Gatos is not listed among cities that impose an additional city conveyance tax, but always confirm before closing. Review the county’s current fee schedule on the Clerk‑Recorder site. Who pays transfer tax is negotiable in the purchase contract, and local custom often has the seller paying it. Confirm with your escrow/title team.
Use Proposition 19 when you move
If you are 55 or older, severely disabled, or a qualified disaster victim, Proposition 19 may let you transfer your Prop. 13 base‑year value to a replacement primary residence anywhere in California, generally up to three times. This can preserve a lower property tax base after you sell and move. Prop 19 also narrowed parent‑to‑child reassessment exclusions, which matters for estate planning. Find eligibility and filing steps at the State Board of Equalization’s Prop 19 page.
Reporting and recordkeeping
Your closing may generate Form 1099‑S showing gross proceeds. If you have taxable gain, you will typically report the sale on Form 8949 and Schedule D. If your entire gain is excluded, you may not need to report the sale, but keep your records and worksheets. See examples in Publication 523.
Special cases to flag
- Foreign sellers: FIRPTA rules often require buyers to withhold 15% of the amount realized when the seller is a foreign person, unless the IRS grants a reduction. If you are a foreign seller or buying from one, review the IRS overview of FIRPTA withholding early in the process.
- Depreciation recapture: If you claimed depreciation for rental or business use, plan for the recapture portion, which is taxed separately and is not covered by the Section 121 exclusion. See Publication 523 for details.
A simple pre‑sale checklist
- Confirm your Section 121 eligibility and whether a full or partial exclusion applies.
- Gather proof of capital improvements, permits, and past closing statements to update your basis.
- Estimate your combined federal, NIIT, and California tax exposure on any taxable gain.
- If selling an investment property, decide early whether a 1031 exchange or installment sale fits your goals.
- Budget the Santa Clara County transfer tax and confirm who pays it in your contract.
- If you qualify for Prop 19 portability, plan your replacement purchase and filing timeline.
Ready to map your sale, taxes, and next move with a calm, construction‑savvy strategy tailored to Los Gatos? Connect with Elena Licari - California to coordinate timing, prep, and escrow details alongside your CPA so you keep more of your equity.
FAQs
How does the $250k/$500k exclusion work for a Los Gatos home sale?
- If you owned and used the home as your primary residence for 2 of the last 5 years, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly per Publication 523.
Are California taxes due on my Los Gatos home sale gain above the exclusion?
- Yes, California taxes capital gains as ordinary income, so any taxable gain is subject to state income tax under the FTB capital gains rules.
What is the Santa Clara County transfer tax for Los Gatos sellers?
- The county documentary transfer tax is $0.55 per $500 of consideration, collected at recording, per the Clerk‑Recorder fee schedule.
Can I use a 1031 exchange when selling my primary residence in Los Gatos?
- No, 1031 applies to investment or business real property, not a primary residence, as outlined in the IRS guide to like‑kind exchanges.
How can Proposition 19 help me when I downsize after selling?
- If you are 55+, severely disabled, or a qualified disaster victim, you may transfer your property tax base to a replacement primary residence under Prop 19, potentially lowering future property taxes.
What if I rented my Los Gatos home before selling it?
- Only the principal residence portion may qualify for the exclusion, and any depreciation claimed must be recaptured per Publication 523.
