A California rental sale can carry four different taxes at once: capital gains, depreciation recapture, the 3.8% NIIT, and California's 13.3% rate. Each one can be legally deferred or softened.
By Hans Goldstein, EA, Tax & Exit Planning · Updated
Admitted to practice before the IRS.
Selling a California rental property is rarely the clean capital gain owners expect. Four separate taxes can land on the same sale, and California is the highest-tax state in the country. Below is what you owe and how to keep more of it.
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Go deeper: the full capital gains picture on a rental property sale on Big Sale Tax.
These work under federal law wherever the rental is. Federal rates on the sale: 0%, 15% or 20% on the gain, up to 25% on depreciation taken (unrecaptured §1250 gain), plus the 3.8% net investment income tax above $250,000 of income married or $200,000 single (2026 brackets, IRS Rev. Proc. 2025-32; IRC §1(h), §1411). Your state comes on top.
| Option | What it does | The catch |
|---|---|---|
| 1. 1031 exchange | Defers all of it, depreciation included, when you buy like-kind real property (IRC §1031) | 45 days to identify, 180 to close, and you stay a property owner |
| 2. Structured installment sale | Spreads the gain over the years you are paid, so more lands in lower brackets (IRC §453); you exit real estate | Must be in the purchase contract before closing; payments are fixed and cannot be cashed out early |
| 3. Delaware statutory trust | Passive replacement property inside a 1031 (Rev. Rul. 2004-86): no tenants, toilets or trash | Illiquid, sponsor fees, same 1031 deadlines |
| 4. Opportunity Zone fund | Defers capital gain reinvested within 180 days; for money invested after December 31, 2026, 5 years plus a 10% basis increase (IRC §1400Z-2 as amended July 4, 2025) | You reinvest cash equal to the gain; depreciation taxed as ordinary (§1245) does not qualify |
| 5. Move in first | Live in it 2 of the 5 years before sale and exclude up to $250,000 ($500,000 married) of gain (IRC §121) | Rental years after 2008 shrink the exclusion pro rata (§121(b)(5)); depreciation is still taxed (§121(d)(6)) |
| 6. Use your losses | Suspended passive losses on Form 8582 are released when you sell the whole property and offset the gain (IRC §469(g)) | Only helps if you have them; capital loss carryovers offset too |
| 7. Hold until death | Heirs get a basis stepped up to value at death, so the gain and the depreciation are never taxed under current law (IRC §1014) | You keep owning and managing it |
A charitable remainder trust (IRC §664) is an eighth route if you have a charitable goal. To see the after-tax number on your own sale, cash vs paid over time, use the seller net sheet after tax.
If you want to keep owning real estate, a 1031 may fit. If you want out, or can't find a replacement, a structured installment sale spreads the capital-gain portion across years and gives you scheduled income. Either way, the move is to plan before you list.
You can defer it with a 1031 exchange (requires buying a replacement property) or a structured installment sale under IRC §453 (spreads the gain over years with no replacement needed). California taxes the gain as ordinary income up to 13.3%, so deferral is especially valuable.
Yes. The depreciation you deducted over the years is recaptured at sale. The straight-line portion is unrecaptured §1250 gain, taxed up to 25% federally. California taxes it as ordinary income with no 25% cap.
Partly. Under IRC 453(i), ordinary-income recapture (section 1245 recapture on items like appliances, carpet and cost-segregated components) is taxed in the year of sale. The unrecaptured section 1250 gain from straight-line depreciation on the building is not recapture income, so it is reported as payments arrive, at up to 25% federally.
A 1031 defers tax only if you reinvest in another like-kind property within strict deadlines. A structured installment sale spreads the gain over years without buying anything, which makes it the better fit if you want to exit real estate entirely.
Potentially four layers: up to 20% federal capital gains, up to 25% recapture on prior depreciation, the 3.8% NIIT, and California ordinary tax up to 13.3%. The combined bite can approach or exceed a third of the gain, which is why deferral planning matters.
Seven legal routes work under federal law: a 1031 exchange, a structured installment sale set up before closing, a Delaware statutory trust inside a 1031, an Opportunity Zone fund within 180 days, moving in to use the home sale exclusion, releasing suspended passive losses, or holding until death for a stepped-up basis. Each has a catch; most of the tax is deferred or spread, not erased.
Before you sign anything, run your numbers with someone who structures the deal to cut the tax and hold up in an audit.
Call 213-414-2808 Run the Numbers →
Send me the sale price and roughly what you paid. Within one business day I’ll come back with the number you’re actually looking at on a California property sale and whether a structured installment sale can push it down. If it can’t, I’ll tell you that just as plainly.
Leave your details and the PDF downloads right away. Within one business day Hans will email a preliminary read on which structure fits your deal. No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
📞 Hans Goldstein · 213-414-2808 · CA Insurance License #4273294 · Independent §453 specialist · Goldstein & Co. LLC
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Federal layers on a 2026 sale of real property held over a year
| Layer | Rate | 2026 threshold (joint / single) |
|---|---|---|
| Long-term capital gain | 0% | Taxable income up to $98,900 / $49,450 |
| Long-term capital gain | 15% | Up to $613,700 / $545,500 |
| Long-term capital gain | 20% | Above $613,700 / $545,500 |
| Unrecaptured §1250 gain (straight-line depreciation on the building) | Up to 25% | Taxed at your ordinary rate, capped at 25% |
| §1245 recapture (equipment, cost-segregated components) | Ordinary, up to 37% | Recognized in the year of sale, even on an installment sale |
| Net investment income tax | 3.8% | Modified AGI above $250,000 / $200,000 (not indexed) |
Source: IRS Rev. Proc. 2025-32 (2026 inflation adjustments), 26 U.S.C. §1(h) and §1411, checked October 3, 2026. The 25% figure is a ceiling: if your ordinary bracket is lower, that rate applies.
You can defer it, not erase it, unless you hold until death for a basis step-up. A 1031 exchange defers everything if you buy like-kind property within 45 and 180 days. A structured installment sale spreads the capital gain and the 25% depreciation gain over the payment years, keeping more of each year in lower brackets, and it can also absorb boot left over from a partial 1031. Suspended passive losses are freed when you sell.
It is a quick screening rule for buyers: assume operating expenses (taxes, insurance, repairs, vacancy, management) will eat about half of gross rent, not counting the mortgage. It says nothing about taxes on a sale. For sellers, the number that matters is the gain over adjusted basis, after years of depreciation lowered that basis.
On a $300,000 long-term gain, most sellers pay 15% federal, about $45,000, with any part above $613,700 of joint taxable income ($545,500 single) taxed at 20% in 2026. Add 3.8% NIIT if modified AGI passes $250,000 joint, up to 25% on any depreciation portion, and California ordinary rates up to 13.3% on the whole gain.
Up to four layers: federal capital gains at 0%, 15% or 20%, up to 25% on the straight-line depreciation (unrecaptured §1250 gain), ordinary rates on any §1245 recapture, the 3.8% NIIT, and California tax up to 13.3% on the full gain with no capital gains discount. On a large sale the combined rate on the gain can pass 37%.
Sources: IRS Rev. Proc. 2025-32; California FTB: capital gains and losses; IRS Publication 537, Installment Sales. Checked October 3, 2026.
