Before Selling California Real Estate, Consider What You May Never Get Back
“Our favorite holding period is forever.”
— Warren Buffett
The Case for Patience
Since the 1970s, California real estate has delivered extraordinary appreciation over the long run — through recessions, shifting regulations, rising costs, and demographic change. There have been plenty of cycles when patient owners questioned whether it was still worth it. I’ve had those thoughts myself, and I’ve made the mistake of selling. But well-located California property has proven remarkably resilient: it recovers, adapts, and keeps building wealth for those willing to hold through the noise.
This is especially true in the San Francisco Bay Area, one of the world’s leading centers of innovation, technology, venture capital, and wealth creation. And it is true in coastal Southern California, where geography itself creates what I often describe as one of the strongest natural barriers to entry in the world: the Pacific Ocean. Coastal California has a finite supply of land, bordered by the ocean on one side and by mountains, protected open space, or fully built-out communities on the other. Combined with a desirable climate, strong incomes, global appeal, and limited opportunity for new development, these constraints have supported property values and rental demand across California’s most sought-after locations for generations.
Why Owners Are Tempted to Sell Right Now
Today, many multifamily owners in Los Angeles and throughout California are facing property values that remain well below the peak pricing of 2021 and early 2022 (single-family rental owners have generally fared better). Rapidly rising interest rates, expanding rent control, escalating insurance premiums, higher operating expenses, and an increasingly challenging regulatory environment have created real headwinds. After several difficult years, it’s understandable that some investors feel frustrated, discouraged, or ready to move on.
But before making the decision to sell, it’s worth pausing to consider what you would actually be giving up. For many owners, the mathematics of selling simply do not work as well as they first appear. What you would be giving up is the gift that keeps on giving.
The First Lock-In: Your Mortgage
We’ve all heard about the “lock-in effect” that has kept for-sale inventory low ever since rates started rising. The historically low interest rates secured during the 2020–2022 period created financing that may never be seen again. Replacing a 2.5% to 3.9% fixed-rate loan with a new loan at today’s rates has a staggering effect on both debt service and amortization.
Anyone holding a 30-year fixed-rate loan in the 2% or 3% range who runs the numbers quickly discovers that payments on a comparable property would often double — with more of each payment going to interest and less to principal. Unless money is no object, these owners should think long and hard before selling. They are locked in, and rationally so.
I believe Proposition 13 is an even bigger reason to stay locked in.
The Bigger Lock-In: Proposition 13
One of the most valuable, and most overlooked, assets a California property owner holds is a low Proposition 13 tax base. Owners who have held property for decades often pay property taxes that are a fraction of what a new buyer would pay on the very same property. When the property is sold, that advantage is permanently lost. It belongs to the owner, not the property, and it has no value to the next buyer.
The advantage extends far beyond today’s tax bill. Proposition 13 limits annual increases in assessed value to roughly 2% per year, allowing long-term owners to compound savings from a dramatically lower tax base over decades. A new buyer receives the same 2% growth limit — but starts from a far higher base. The result is a significant, and often permanent, economic advantage for long-term owners.
This reality gives even greater meaning to Warren Buffett’s famous observation: “Our favorite holding period is forever.”
The Market Will Not Pay You for It
What makes Proposition 13 particularly valuable is that its benefit belongs exclusively to the current owner. Unlike a remodeled kitchen, a larger lot, or a superior location, a low property tax basis cannot be transferred to a buyer — and the market does not compensate sellers for surrendering it.
Many investors who sell and exchange into Delaware Statutory Trusts (DSTs), net-lease properties, or other replacement real estate fail to account for the value they are leaving behind. In effect, they give up an economic benefit that may have taken decades to create, yet receives no recognition whatsoever in the property’s sale price.
A low Proposition 13 tax base is a growing, lifelong economic advantage. Once relinquished, it is gone forever. Future owners pay dramatically higher taxes on the exact same property.
Two Exceptions Worth Knowing: Proposition 19
Proposition 19 created two narrow paths to preserve a low tax base — but note that both apply to primary residences, not investment property:
- Homeowners who are 55 or older (along with the severely disabled and victims of wildfire or natural disaster) can transfer their Prop 13 assessed value to a replacement home anywhere in California, up to three times. If the replacement home costs more, the difference is added to the transferred base.
- A child who inherits a parent’s primary residence and makes it their own primary residence within one year can keep the parent’s tax base, up to the factored base-year value plus an inflation-adjusted exclusion (approximately $1.04 million for transfers through February 2027). Value above that limit is added to the new assessed value.
What You Would Be Walking Away From
At the same time, California’s most desirable locations continue to possess characteristics that are extraordinarily difficult to recreate:
- Limited land supply and significant barriers to new construction
- High-demand locations with strong long-term wage growth
- A desirable climate and lifestyle with global appeal
- Proximity to the ocean and other natural amenities
- The innovation center of the world — AI, technology, biotech, and venture capital
In our view, these markets — especially near Bay Area AI, tech, biotech, and other high-skill, high-wage employment, and along the Southern California coast, deserve careful consideration before selling. Real estate markets inevitably rise and fall, but history suggests that choice California locations have repeatedly demonstrated resilience over very long time horizons.
Our Honest Position
As real estate investment advisors, we earn a commission when investors sell, complete a 1031 exchange, and reinvest in DST investment properties. But we sleep much better at night when we tell the truth — and in almost every case we have seen, investors who held their California real estate investments performed better than those who sold and exchanged into out-of-state properties, including DSTs, net-leased, and other replacement real estate.
If you are going to sell, make sure the move puts you in a stronger position than the one you are in today. And if it doesn’t — hold.
Long-Term Ownership vs. Selling California Investment Property
| Consideration | Continue Holding | Sell the Property |
|---|---|---|
| Proposition 13 Tax Base | Preserved | Permanently lost |
| Property Taxes | Continue benefiting from historically low assessed value | Reset to current market value |
| Mortgage Financing | Retain existing low-rate loan | Replace with today’s higher interest rates |
| Capital Gains Taxes | Deferred until future sale | Tax due unless deferred through a 1031 exchange |
| Cash Flow | Maintains existing financing and tax advantages | May decline due to higher debt service and operating costs |
| Long-Term Appreciation | Continue participating in California market growth | Must rely on performance of replacement investment |
| Investment Flexibility | Continue holding proven asset | Opportunity to reposition through a 1031 exchange or other investment |
| Risk | Continued exposure to California regulations and operating costs | Exposure shifts to new market, property, or investment structure |
Frequently Asked Questions
Is selling California investment property always the right financial decision?
Not necessarily. While selling may provide liquidity or allow an investor to complete a 1031 exchange, many owners underestimate the long-term value of low property taxes, favorable financing, and continued ownership in historically resilient California markets.
Why is Proposition 13 so valuable for investment property owners?
Proposition 13 limits annual increases in assessed value, allowing long-term owners to pay substantially less in property taxes than new purchasers of comparable properties. Those savings compound over decades and generally disappear once the property is sold.
Can I transfer my Proposition 13 tax basis to another investment property?
No. Proposition 13 tax benefits generally remain with the current property owner and cannot be transferred to another investment property after a sale.
Does Proposition 19 allow investors to keep their property tax basis?
Generally, no. Proposition 19 primarily applies to qualifying owner-occupied primary residences under specific circumstances. Investment properties typically do not qualify for these transfer provisions.
Can a 1031 exchange replace the benefits of Proposition 13?
A 1031 exchange can defer capital gains taxes, but it does not preserve a property’s existing Proposition 13 tax basis or historically low mortgage financing. These are separate financial advantages that should be evaluated independently.
Should low mortgage rates influence my decision to sell?
Absolutely. Owners who secured fixed-rate financing during periods of historically low interest rates may face significantly higher borrowing costs when purchasing replacement property, reducing future cash flow and investment returns.
Why don’t buyers pay more for a property with a low Proposition 13 tax basis?
Because Proposition 13 benefits belong to the current owner, not the property itself. When ownership transfers, the property is generally reassessed at its current market value, meaning the buyer does not inherit the seller’s lower tax basis.
What types of replacement property are commonly used in a 1031 exchange?
Investors often exchange into apartment communities, commercial buildings, industrial properties, triple-net leased assets, or Delaware Statutory Trust (DST) investments, depending on their investment objectives and desired level of management responsibility.
Should I perform a 1031 exchange or continue holding my property?
The answer depends on your financial goals, cash flow needs, tax situation, estate planning objectives, and long-term investment strategy. Before making a decision, evaluate the full economic value of your existing property—not just its current market price.
What professionals should I consult before selling investment property?
Before listing a property, investors should speak with their Qualified Intermediary (QI), CPA, tax advisor, estate planning attorney, and investment advisor to understand both the tax implications and long-term financial consequences of selling.
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Securities offered through McDermott Investment Services, LLC, a Registered Broker Dealer, Member FINRA, SIPC, MSRB. McDermott Investment Services, LLC does not provide legal or tax advice, and purchasers should contact their attorneys and/or accountants for situations that may have legal and/or tax implications. The material contained herein neither constitutes an offer to sell nor an offer to buy real estate or securities. Such offers are made only by the sponsor’s private placement memorandum, which is always controlling. There are natural risks associated with the ownership of real estate, including acquiring interests as replacement property in a 1031 exchange, which are for accredited investors only.
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