Selling a Rental Property in California: Taxes, Capital Gains & 1031 Exchange Guide

If you’re interested in selling a rental property in California, and it’s time to sell, you naturally want to get the best price of the property that you can. While the complicated rules and regulations involved — along with your fear that you may face a high tax liability — may leave you feeling nervous, it’s important to know that you’re not alone.

Selling an investment property can be an excellent opportunity when you have a better understanding of the federal and state tax laws that apply and have the skilled guidance of a real estate investment company on your side.

Selling a rental property in California guide

Selling rental property in California doesn’t have to be a long, complicated process that leaves you bogged down by endless details or delays in finding potential buyers. If you sell the property after owning it for less than a year, you may have to pay steeper taxes, but there are ways to reduce your tax exposure.

Consulting with a real estate investment company that buys properties like yours outright, manages all the ins and outs, and helps soften the tax blow is always an excellent plan.

Want to know how to sell rental property fast? 

If you’re thinking about selling your California rental property or have made up your mind on the matter, you may not have any idea where to begin, but rest assured that help is available. At SoCal, we’re professional real estate investors, and our business is based on selling made simple.

We take the stress out of selling your rental, and we’re standing by to help guide you through every step of the process to get the property sold on your timeline, hassle-free. We place a strong focus on maximizing your return on investment, minimizing your tax consequences, and doing away with the hassle and expense of listing, which tends to be a long, drawn-out process. 

Ready to learn more about how to sell a rental property?

Reach out for more information today. 

How to sell investment property

Figuring out how to sell an investment property in California can be complex. Whether you’re selling to tenants, marketing to traditional buyers, or working with an investor, each option offers unique benefits and challenges. Let’s explore each approach to help you decide the best path forward.

Selling to your current tenants

Selling to existing tenants can be an efficient way for a landlord to offload a rental property, especially if you have a good tenant with a strong payment history who is interested in purchasing the property. This option can make the transition smoother and retain income until the sale finalizes.

Keep in mind, however, that tenant financing may add some complexity, which can affect your overall timeline. Consulting with a tax advisor can also clarify any specific financial impacts of selling to tenants rather than through other methods.

Selling to a home buyer

Another approach to consider is selling your California rental to a buyer who is in the market for a primary residence — rather than a rental. This method generally requires working with a real estate agent to help ensure that your rights are protected and that the sale proceeds smoothly.

While you may be tempted to skip the middleman, property owners who work with realtors typically achieve higher profits on average. Additionally, buyers looking for primary residences may be able to secure different financing options compared to investment buyers, potentially speeding up the process and simplifying negotiations for both parties.

Selling to an investor

If you have an rental property for sale with tenants or a rental property for sale that is vacant, selling directly to an investor can simplify the process. Working with experienced investors can help you avoid the complexities involved in tenant management and property listings. Whether dealing with tenants or preparing a vacant property, investors can help you close quickly and make the selling process seamless.

We buy rentals directly and know the California real estate market very well, allowing you to skip the hassle and expense of hiring a realtor and dramatically reduce the amount of time required to close the sale.

Real estate investors also buy properties “as-is,” allowing you to avoid repairs and renovations, inspections, and lengthy negotiations, which can be a major selling point for owners looking to close quickly. Selling to an investor can be especially beneficial if you need to close quickly, regardless of property condition or the presence of tenants.

If you are selling with tenants

Selling the rental property with tenants in place may offer financial benefits, such as avoiding vacancy periods and maintaining rental income until the sale closes. If your tenants are on a month-to-month lease, this could simplify the transition, allowing more flexibility in the sale process. 

When selling a house with tenants, working with an investor like SoCal Home Buyers can streamline this process significantly. We manage logistical aspects such as tenant notifications, property preparations, lease compliance, and — if necessary — eviction procedures.

Our experience with California rental laws allows you to avoid tenant-related complications while staying within the legal requirements. For example, if you need to terminate their tenancy, we can guide you through a smoother transaction and help make the sale faster.

If you’re interested in an efficient sale, we buy houses in California and are ready to help you navigate the sale with tenants involved.

If your rental property is empty

An empty rental property offers the flexibility to sell without coordinating tenant schedules, but it also means going without the income, which can increase financial pressure. Selling quickly becomes a priority, as ongoing expenses for upkeep, security, and property taxes can add up.

Working with us can help you bypass the delays of traditional listings. We specialize in purchasing rental properties quickly, often closing within just 7 days, so you can sell your home fast and reduce vacancy time while focusing on your next steps with confidence.

Taxes consequences when selling a rental property

If it’s time to consider the sale of your rental property, it’s essential to understand the role taxes will play. The California tax on sale of rental property includes long-term capital gains and short-term capital gains tax — along with the depreciation recapture tax rate. With recent trends affecting rental property in 2023, it’s worth noting that market conditions and tax policies may have shifted, influencing your 2024 sale.

Understanding the nuances of California’s capital gains tax and when to sell rental property can help you better anticipate the costs involved. Additionally, certain allowable expenses — such as appraisal fees, inspections, and transfer fees — can help reduce your taxable gain, providing potential tax savings.

It’s also worth noting that, depending on your income, the Net Investment income tax (NIIT) may apply to your capital gains from the sale. These expenses are subtracted from your total gains, which could lower the amount subject to capital gains.

Let’s take a closer look at these elements.

Capital gains tax on rental property in California

The profit you make on the sale of your residential rental property triggers a California capital gains tax. This capital gains calculation for rental property is based on factors like your income level and how long you’ve owned the property, whether short-term or long-term.

If you’ve owned the rental for less than a year, your profits will be taxed at the same rate as your regular income, which is generally between 10% and 37%, and this is referred to as short-term capital gains. 

If, however, you’ve owned the rental longer than one year, your profits will be taxed at a rate of 0% to 20% — depending on your income and income tax rate — this is called a long-term capital gains.

When calculating your capital gains, it’s important to understand the sale price and the adjusted cost basis, which can affect the overall tax.

Consider the following tax rates for a rental in 2024:

• Those who earn no more than $44,625 pay no capital gains.
• Those who earn from $44,626 to $492,300 pay 15% capital gains. 
• Those who earn more than $492,300 pay 20% capital gains
  

These tax rates are considerably lower than they would be on your regular income. This means that, if you sell your property prior to owning it for a year, you’ll be paying capital gains at the same rate as your income tax, which will result in a higher tax amount overall. 

If you’ve owned the property for longer than one year, however, the amount of tax on your capital gains — or profit — will generally be lower, which means paying fewer taxes overall.

Selling a rental you’ve owned for 10 months

The best way to gain a better understanding of how federal capital gains tax works is with examples. 

Let’s say that you are selling a rental that you bought 6 months ago for a purchase price of $500,000. If you turn around and sell it for $600,000, the difference between the sale price and the purchase price is $100,000, and you’ll have to pay capital gains on this amount at your income tax rate. If you’re a single filer with an income between $41,776 and $89,075, you pay 22%in income tax, which exceeds even the highest capital gains rate. 

Selling a rental you’ve owned for two years

If, instead, you’ve owned that same rental mentioned above for two years and you make the same amount of profit on its sale, the amount of capital gains you’ll be required to pay — as a single filer whose income exceeds $44,625 under the current tax code — is 15%, which is a considerable tax savings (as compared to the 22% above). 

Those single filers who earn less than $44,625 owe nothing in capital gains. 

Depreciation recapture tax on rental property in California

Just to make things more complicated, there is also a tax based on the depreciation tax break that investors enjoy. 

Rental property owners who invest in rentals receive a tax break on the amount the property depreciates in value each year, which is subtracted from the taxable rental income the property generates per year of ownership. 

When you sell your rental, however, the federal government takes back — or recaptures — some of this tax break with a tax calculated at the same rate as your income. Consider the following example: 

• You purchased a rental for $500,000 and you held on to it for 5 years.
• Over those 5 years, the property depreciated at a rate of $10,000 per year. 
• This adds up to $50,000 in total depreciation (5 years x $10,000). 
• The IRS taxes this $50,000 at the same percentage as your income is taxed, known as depreciation recapture. 

How to sell rental property without paying taxes

While there generally is no way to sell your rental without facing any tax consequences, there are strategic ways to limit your tax liability. If you’re exploring options for how to avoid capital gains taxes on a rental property, strategies like a 1031 exchange allow you to reinvest proceeds into another investment property and defer tax payments.

Additionally, understanding how to report sale of rental property correctly is essential for ensuring compliance and making the most of any eligible deductions. For more information on reporting requirements, see our related article.

Sell your rental property with tenants or without to us!

If you are ready to get your property sold quickly and are interested in bypassing the common pitfalls of doing so, we are standing by to help. We are committed to helping you sell your house fast, to limiting your property taxes, and to taking care of the details so you don’t have to.

We’re professional real estate investors, which means we take over the responsibilities that home owners face when they decide to sell. We’ve got the experience, the resources, and the drive to help you put your concerns about the sale of your rental behind you.

Use a 1031 exchange in California

The 1031 tax deferred exchange California law allows you to defer capital gains and other taxes on prior depreciation after you sell your home. How does a 1031 exchange work in California? It allows you to put off paying both capital gains and taxes on previous depreciation until a later date if you follow specific rules that include:

• After your home sale, you must purchase your property of the same kind, which means it must be an investment property that you intend to either use as a rental or flip.
  
• You must identify this property as a replacement property within 45 days of closing on your current rental. 
• You must close on the replacement property within 180 days of the original property’s closing.

The 1031 exchange rules California allow you to avoid both forms of tax until you sell your new rental.

Pass the ownership and use test

If you want to sell your rental and it was your main residence for at least some of the time that you owned one property, the government will grant you a deduction on your capital gains if you can pass the ownership and use test. In order to do so, both of the following must apply:

• You must have owned your property for at least 2 years.
• You must have used the home as your main residence for at least 2 out of the past 5 years.

I want to sell my rental property fast, how can you help?

I’m thinking of selling my rental to Socal — how do I proceed? you might ask. Well, don’t wait to reach out for the help and guidance you’re looking for. We’ve simplified the process to make it easier for anyone who is ready to sell their investment property quickly, and it all comes down to the following 4 simple steps: 

1. Request your fair cash offer by calling 951-331-3844 or fill out the short form below.
2. We’ll call you to discuss your property and schedule a one-time inspection so we can offer you the highest amount possible.
3. We’ll make you a fair cash offer on your home at your inspection. If you like our offer, you can consider your home sold!
4. Simply choose your closing date and we’ll close on the date you need. You can receive payment via check or wire transfer. It’s that simple!

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