Capital Gains Tax on a Property Sale in Los Angeles — A Realistic Breakdown
Federal Capital Gains — The Starting Point
The federal government taxes long-term capital gains (property held over one year) at 0%, 15%, or 20% depending on your total taxable income. In LA, where median home values sit well above $800,000, most sellers land in the 15% or 20% bracket. Short-term gains — from properties held less than a year — get taxed at your ordinary income rate, which can run as high as 37%.
One thing to watch: the IRS doesn’t care what the property is worth today versus what it was worth five years ago. They care about your adjusted basis — what you paid, plus improvements, minus any depreciation you claimed or should have claimed. That last part trips up a lot of rental property owners in LA who forgot they were depreciating the building.
The $250K/$500K Primary Residence Exclusion
If the property was your main home for at least two of the five years before the sale, you can exclude up to $250,000 of gain ($500,000 for married couples filing jointly). In Los Angeles, where appreciation has been steep for decades, plenty of longtime homeowners still end up with taxable gains above the exclusion.
A couple who bought a house in Silver Lake for $400,000 in 2005 and sells it for $1.4 million in 2025 has a $1 million gain. After the $500,000 exclusion, they still owe tax on $500,000. That’s not a small number.
California Taxes Capital Gains as Ordinary Income
This is the part that surprises people moving from states with preferential capital gains rates. California doesn’t offer one. Your gain sits on top of your other income and gets taxed at the same rate — up to 13.3% for the highest earners. That’s the highest state income tax rate in the country.
For a seller in the $500,000-and-up income range (which is easy to hit when you add a large gain to a working salary), you’re looking at a combined federal and state rate approaching 33% before the net investment income tax even kicks in. There’s no city income tax in LA, which is at least one layer you don’t have to worry about.
LA County Transfer Tax and Measure ULA
Los Angeles County charges a documentary transfer tax of $1.10 per $1,000 of the sale price. The City of Los Angeles adds another $4.50 per $1,000 for sales under $5 million. On a $1.5 million home, that’s about $8,400 combined.
For properties selling at $5 million or above, the city’s Measure ULA (sometimes called the “mansion tax,” effective April 2023) adds a 4% transfer tax. Sales of $10 million or more face a 5.5% rate. This tax is paid by the seller and is based on the total sale price, not the gain.
Proposition 19 and Property Tax Transfers
While not a capital gains issue directly, Prop 19 changed how inherited properties work in California. Before 2021, children could inherit a parent’s property and keep the low Prop 13 tax basis. Now, unless the child uses the property as a primary residence within a year, the property gets reassessed to market value. This pushes more families toward selling inherited property rather than keeping it — which means more capital gains events.
If you inherited property in LA and are thinking about selling, the stepped-up basis rules still apply federally. Your basis is the fair market value at the date of death, not what your parents originally paid. That stepped-up basis can eliminate or sharply reduce your capital gains tax.
Quick Estimate: Selling a $2M Rental in LA
Say you bought a rental duplex in Echo Park for $900,000 and sell it for $2 million after eight years. After accounting for $200,000 in depreciation and $80,000 in improvements, your adjusted basis is $780,000. The gain is $1,220,000. Here’s the rough math:
- Federal long-term capital gains (20%): $244,000
- Net investment income tax (3.8%): $46,360
- California state tax (~12.3%): $150,060
- Depreciation recapture (25% federal on $200K): $50,000
- LA County + City transfer tax ($5.60/$1,000): $11,200
Total estimated taxes: roughly $501,620. That’s over 41% of the gain — and California doesn’t allow a 1031 exchange to defer the state portion if the replacement property is out of state.
Key Takeaway
California’s treatment of capital gains as ordinary income — combined with the NIIT and LA’s transfer taxes — means sellers in Los Angeles face some of the steepest total tax burdens on property sales anywhere in the U.S. Documenting every improvement, timing the sale correctly, and exploring 1031 exchanges are all worth discussing with a CPA before you list.
Frequently Asked Questions
Does California have a lower rate for long-term capital gains?
No. California taxes all capital gains — short-term and long-term — at the same rate as ordinary income. The top rate is 13.3%. This is different from the federal system, where long-term gains get preferential rates.
Can I do a 1031 exchange on a rental property in LA?
Yes, for federal tax purposes. But California tracks the deferred gain. If you exchange into a property outside California, the state will tax the original gain when you eventually sell the replacement property — even if you no longer live in California at that point.
What is Measure ULA and does it affect my sale?
Measure ULA is a City of Los Angeles transfer tax that applies to sales of $5 million or more. The rate is 4% for sales between $5 million and $10 million, and 5.5% for sales above $10 million. It’s paid by the seller at closing.
How does depreciation recapture work on a rental property?
If you claimed depreciation on a rental property (or should have), the IRS “recaptures” that depreciation when you sell. The recaptured amount is taxed at a flat 25% federal rate, separate from your capital gains rate. California taxes it as ordinary income.
Do I owe tax if I sell a home I inherited in Los Angeles?
Your basis for an inherited property is typically the fair market value at the date of the prior owner’s death — not the original purchase price. If the property hasn’t appreciated much since the inheritance date, your capital gain may be small or zero. But Prop 19 changes may affect your property tax assessment.
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