What Taxes Do You Owe When You Sell a California Rental Property?

How is the gain on a rental property figured?

Gain is the amount realized minus your adjusted basis. The amount realized is the sale price minus selling expenses. Adjusted basis starts with what you paid, goes up for improvements and certain purchase costs, and goes down for depreciation (IRS Publications 527, 544 and 551).

Three rules make the basis smaller than owners expect:

• Land is never depreciated. When you buy, you split the price between land and building by their fair market values; the IRS allows the property tax assessment's ratio if you are unsure (Pub 527).
• A residential rental building is depreciated straight-line over 27.5 years, using a mid-month convention for the month it goes into service and the month it is sold (Pub 527).
• Basis goes down by depreciation "allowed or allowable": the full amount you could have deducted, even in years you did not claim it (Pubs 527 and 551).

What does that look like on a sale?

Here is a hypothetical rental, with numbers invented for arithmetic only on November 7, 2026: bought for $900,000, of which $360,000 is land; rented the whole time; sold 10 years later for $1,400,000 with $70,000 of selling costs. No improvements, and depreciation was taken every year.

The building's $540,000 basis, divided by 27.5, gives $19,636 a year, or $196,364 over 10 years. Adjusted basis is $703,636. The amount realized is $1,330,000, so the total gain is $626,364. Of that, $196,364 comes from depreciation and $430,000 is the rest of the long-term gain. The FTB's own estimate method for Form 593 gives the same depreciation: $540,000 ÷ 27.5 × 10.

What federal tax rates apply to the gain?

For a rental building depreciated straight-line and held more than one year, the IRS says there is no ordinary-income recapture (Pub 544). Appliances, carpets and furniture depreciated separately are different: gain on them is ordinary income up to the depreciation taken (Pubs 527 and 544). On the building, the part of the gain that comes from depreciation is "unrecaptured section 1250 gain," taxed at a maximum of 25% (Topic 409; Internal Revenue Code 1(h)). The rest of a gain on property held more than one year is taxed at 0%, 15% or 20%, depending on your taxable income including the gain.

The 3.8% net investment income tax applies to the lesser of your net investment income, which includes gain from the sale of investment real estate, or your modified adjusted gross income above $200,000 single, $250,000 married filing jointly or $125,000 married filing separately. Those thresholds are not indexed for inflation (IRS).

How does California tax the sale of a rental?

California has no lower rate for capital gains. In the FTB's words, "All capital gains are taxed as ordinary income." For 2025, California's rates run up to 12.3%, plus the 1% Behavioral Health Services Tax (formerly the Mental Health Services Tax) on taxable income over $1,000,000.

California's figure can differ from the federal one. The state generally follows the Internal Revenue Code as of January 1, 2025, and California depreciation or basis may differ from federal, which is why Form 593 asks for depreciation "on your California income tax return."

What is withheld at closing for California (Form 593)?

"Withholding is required when California real estate is sold or transferred," the FTB says, and it is a prepayment, "not an additional tax." Escrow sends it to the FTB, and you claim it on your return.

The standard amount is 3 1/3% of the sales price, which the FTB applies as .0333. In the example, $1,400,000 × .0333 is $46,620. A seller may instead elect withholding on the estimated gain worked out in Form 593 Part VI, at 12.3% for an individual. No withholding is required when the price is $100,000 or less, or when the seller certifies an exemption, including:

• the property qualifies as your principal residence under the federal home-sale rules (you owned it and lived in it as your main home for at least two of the five years before the sale), even if you have rented it since; or its last use was as your principal residence, an exemption not available if the last use was as a rental, vacation or second home;
• the sale produces a loss or zero gain for California income tax purposes, shown in Part VI; the FTB says you may not claim this just because you receive no cash;
• a 1031 exchange, though withholding applies when cash or other property you receive in the exchange exceeds $1,500.

When must I give escrow Form 593?

Before closing. "The seller/transferor must submit Form 593 before the close of the real estate transaction to prevent withholding," the FTB instructs; after that, money withheld comes back only as a credit on your return. Being exempt from withholding does not remove the duty to file a California return, and knowingly signing a false certificate carries a penalty of $1,000 or 20% of the required withholding, whichever is greater.

What changes if the seller is a foreign person?

Under FIRPTA, when a foreign person for U.S. tax purposes sells U.S. real property, the buyer generally must withhold 15% of the amount realized and send it to the IRS on Form 8288 within 20 days (26 U.S.C. 1445; IRS). For FIRPTA, the amount realized is the price the buyer pays, including any debt the buyer takes on, with no subtraction for selling costs. For an individual, a foreign person is a nonresident alien; the IRS says the term does not include a resident alien. The withholding is credited against the seller's actual U.S. tax, which is figured at the same graduated rates as for U.S. residents (IRS Pub 519). Nonresident aliens are not subject to the 3.8% net investment income tax.

The lower rates set by price apply when the buyer will live in the home: no withholding up to a $300,000 amount realized, and 10% up to $1,000,000. Either the buyer or the seller may ask the IRS for a withholding certificate on Form 8288-B when 15% would exceed the seller's tax; the IRS generally acts within 90 days of a complete application. In the example, 15% of the $1,400,000 price would be $210,000 unless an exception or certificate applies.

Can a 1031 exchange defer the tax?

Yes, if you exchange real property held for business or investment for other real property held the same way (26 U.S.C. 1031). Since 2018, exchanges are limited to real property, and U.S. real property is not like-kind to property outside the United States. The deferred gain, including the depreciation, carries into the replacement property's basis.

The deadlines are strict. The IRS postpones them only in limited cases, such as when it announces relief for taxpayers affected by a federally declared disaster, and automatically for members of the Armed Forces serving in a combat zone (Rev. Proc. 2018-58):

• Identify replacement property in a signed writing within 45 days after you transfer the property you sell: up to three properties of any value, or any number totaling no more than twice the value of what you sold.
• Receive the replacement within 180 days, or by your return's due date including extensions, whichever is earlier. If you transfer on November 15, 2026, day 45 is December 30, 2026 and day 180 is May 14, 2027, after the usual April due date, so you would need to extend the return to keep the full 180 days.
• Do not touch the money. If you receive the cash before the replacement property, the IRS treats it as a sale. A qualified intermediary holds the funds. It cannot be a related person, such as a family member or a company you own more than 10% of, or anyone who acted as your employee, attorney, accountant, broker or real estate agent within the two years before the sale (Pub 544).
• Cash or debt relief you receive is taxable up to your gain, and California withholding applies when cash or other property you receive exceeds $1,500.
• File Form 8824 for the year of the exchange. If the replacement is outside California, the FTB requires Form 3840 for that year and every later year until the California gain is taxed.

What if the rental used to be my home?

The home-sale exclusion of up to $250,000, or $500,000 for joint filers, requires that you owned the home and lived in it for at least 24 months of the five years before the sale (IRS Pub 523). Two limits matter for a former home:

• Depreciation for periods after May 6, 1997 is never excluded; that part of the gain is taxed even if the rest qualifies.
• Gain allocated to periods after 2008 when it was not your main home, such as renting it before you moved in, is not excludable. Renting it after you move out, within the five years before the sale, does not count against you.

What should I bring to my CPA before listing?

• Your purchase settlement statement, to separate costs added to basis from loan costs.
• Receipts for improvements, and the depreciation schedules from your federal and California returns.
• Any prior-year losses on business property or suspended rental losses, which can change the result.
• Whether you will do a 1031 exchange, so a qualified intermediary is in place before closing.
• Which Form 593 exemption, if any, applies, and whether you are a foreign person for U.S. tax purposes.
• Whether you need to make an estimated tax payment for the quarter you sell.

The short version

Depreciation lowers your basis whether or not you claimed it, and that part of the gain is taxed federally at up to 25%; the rest, on property held more than a year, is a 0%, 15% or 20% capital gain, plus 3.8% above the income thresholds, and California taxes all of it as ordinary income. Plan Form 593 before closing, and if you want a 1031 exchange, line up the intermediary before you sell and mark the 45-day and 180-day dates.

Every rule and figure above was checked against the IRS's and the FTB's own documents on November 7, 2026. The worked example is hypothetical. This is general education, not tax advice; confirm with your CPA before you list.

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