California’s 13.3% Rate — How It Works

California’s income tax tops out at 13.3%, and that rate applies to all forms of income including capital gains. The 13.3% figure includes a 1% Mental Health Services Act surcharge on income exceeding $1 million. Below that threshold, the rates climb through nine brackets starting at 1%.

For a Los Angeles resident selling a home or stock portfolio with $800,000 in gains, the state tax alone runs around $76,000. Sell for $1.5 million in gains and you’re looking at roughly $170,000 to Sacramento. These are real numbers that catch people off guard, especially founders cashing out equity for the first time.

No Long-Term Capital Gains Preference at All

The federal tax code rewards patience. Hold an asset for over a year and your gains qualify for preferential rates of 0%, 15%, or 20%. California ignores this entirely. A stock you held for ten years and a stock you held for ten days face the same state rate.

This matters more than most LA investors realize. Someone in the top federal bracket who sells $1 million in long-term gains pays 20% federally on that gain (plus NIIT). But California adds another 13.3% as if those gains were salary. The combined rate pushes past 37% before any planning.

For comparison: Texas, Florida, Nevada, and Washington charge 0% on capital gains at the state level. Moving from Los Angeles to Austin before a liquidity event saves $133,000 on every $1 million in gains. The Franchise Tax Board knows this, and they audit accordingly.

NIIT and Federal Taxes Stack on Top

The 3.8% Net Investment Income Tax hits single filers with MAGI above $200,000 and joint filers above $250,000. In Los Angeles, most people with meaningful capital gains blow through those thresholds easily. Combined with the 20% long-term federal rate, the federal layer alone costs 23.8% on long-term gains.

Add California’s 13.3% and the all-in rate reaches 37.1% for a Los Angeles resident with over $1 million in gains. On a $3 million gain from selling a startup stake or investment property, that’s roughly $1,113,000 in total tax. More than a third of your gain goes to taxes, and you haven’t even accounted for depreciation recapture on real estate.

LA Real Estate: Depreciation Recapture and Prop 19

Los Angeles property investors face an extra layer of pain. When you sell a rental property, the IRS recaptures depreciation at 25% federally. California recaptures it at ordinary income rates too, up to 13.3%. On a property you’ve depreciated over 15 years, the recapture amount can be $200,000 or more.

Proposition 19, which took effect in 2021, also changed the rules for inheriting property. Before Prop 19, children could inherit a parent’s property tax basis regardless of what they did with the property. Now that basis transfer only applies if the child uses the home as a primary residence, and even then it’s limited if the assessed value is significantly lower than market value. This creates urgency around estate planning for LA families sitting on properties purchased decades ago at a fraction of today’s prices.

Exit Tax Considerations for Leaving California

California does not have an explicit “exit tax” on the books. But the Franchise Tax Board’s residency audit process functions as a de facto one. If you sell a major asset within 18 months of moving out of state, expect scrutiny.

The FTB looks at where you voted, where your doctor and dentist are, where your kids go to school, your cell phone usage patterns, your driver’s license, and dozens of other “closer connection” factors. Simply renting an apartment in Nevada and updating your mailing address is not enough. People who try this without genuine life restructuring end up owing California the full tax plus penalties and interest.

For LA residents planning a large exit (selling a business, IPO, real estate portfolio liquidation), the planning needs to start 12 to 24 months before the event. Establishing domicile in another state is a process, not a transaction.

Strategies That Actually Work in California

Installment sales under IRC Section 453 let you spread gain recognition over multiple tax years, which can keep you below the $1 million threshold where the mental health surcharge kicks in. Selling a $2 million property over four years of payments instead of one lump sum could save $20,000+ in state taxes.

Qualified Small Business Stock (QUBS) under Section 1202 excludes up to $10 million (or 10x basis) of gain from federal tax on stock held for five or more years in a qualifying C-corp. California partially conforms to this exclusion but only allows 50% of the gain to be excluded. Still, on a $5 million gain, that’s $332,500 in California tax savings.

Charitable remainder trusts, donor-advised funds, and 1031 exchanges for real estate all remain viable tools. None of them eliminate the tax entirely, but they shift timing or reduce the taxable amount in meaningful ways.