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Selling Rental Property in California: Taxes on Investment & More

If you’re interested in selling a rental property in California, you naturally want to get the best sale price 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.

Disclaimer: The information provided in this article is for educational purposes only and should not be construed as legal advice. We are not experts in legal matters, and readers are encouraged to seek the proper professional legal counsel for specific guidance.

Key Takeaways

  • Selling rental property in California involves understanding taxes like capital gains and depreciation recapture.
  • Options include selling to tenants, home buyers, or investors.
  • Use the 1031 exchange to defer taxes.
  • Manage tenant rights and handle empty properties.
  • Consult a real estate investment company for smoother transactions.

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. 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 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 Home Buyers, we’re professional real estate investors, and our business is based on selling made simple. We take the stress out of selling your investment property, and we’re standing by to help guide you through every step of the process — with a 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

Selling to your current tenants

If you and the tenants in your rental property have already established a relationship based on trust and respect, selling to your renters may be a good option.

Selling your rental property to good tenants can streamline the selling process and eliminate the need for a realtor. Furthermore, your renters have important legal rights, and eviction without cause will only lead to a legal battle. 

Selling to a home buyer

Another approach to consider is selling your California rental property to a buyer who is in the market for a primary residence — rather than a rental property. 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 turn higher profits on average.

Selling to an investor

A more effective and speedy way to address the sale of your rental property is by selling to a real estate investor like SoCal Home Buyers. We buy rental properties directly and we know the California real estate market very well. This allows you to skip the hassle and expense of hiring a realtor and dramatically reduce the amount of time required to sell your house. 

If you are selling with tenants

If you are selling a house with tenants who have a lease, you have few options other than waiting out the lease or buying your tenants out. 

Even tenants who rent on a month-to-month basis in California have clear legal rights that require rental property owners to give them at least 60-days notice. 

At SoCal Home Buyers, we buy houses in California, and we welcome the opportunity to make you an offer on your rental property with tenants. When you leave the matter of dealing with tenants to us, we take care of all the following:

  • Notifying the tenants prior to sale
  • Addressing the tenants’ lease and the need to terminate their tenancy — in compliance with California’s renter-friendly laws
  • Showing the rental property to potential buyers while the tenants are living there
  • Preparing the property for sale, including making all necessary repairs and renovations

If your rental property is empty

If your rental property is empty, you won’t face any concerns related to tenants, but it comes at a price. The longer it takes to sell your rental property, the longer you will go without rental income, which can be a financial burden. If you don’t have a renter, it’s that much more important to make the sale, and SoCal Home Buyers can help make that happen. 

Taxes when selling a rental property

If it’s time to sell, it’s time to consider the role taxes will play. The California tax on the sale of rental property includes long-term capital gains and short-term capital gains tax — along with depreciation recapture tax. Let’s take a closer look at when to sell rental property.

Capital gains tax on rental property in California

The profit you make on the sale of your residential rental triggers a capital gains tax, which is calculated in direct relation to your income and how long you’ve owned the property. 

If you’ve owned the investment property 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 tax. 

If, however, you’ve owned the rental property 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 tax.

Consider the following capital gains tax rates for a rental property in 2023:

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

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 tax at the same rate as your income tax, which is a higher rate. If you’ve owned the property for longer than one year, however, you’ll pay fewer taxes on your capital gains — or profit. 

Selling a rental you’ve owned for 10 months

The best way to gain a better understanding of how federal capital gains tax work 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, you are left with a profit of $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 tax you’ll be required to pay — as a single filer whose income exceeds $44,625 — 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 tax. 

Depreciation recapture tax on rental property in California

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

Those who invest in rental properties get 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 property, however, the federal government takes back — or recaptures — some of this tax break with a depreciation recapture tax that is calculated at the same rate as your income.

Consider the following example: 

  • You purchased a rental property 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. 

How to sell rental property without paying taxes

While there generally is no way to sell your rental property without facing any tax consequences, there are strategic ways to limit your tax liability. In a related vein, you can take a look at our article on how to report sale of rental property correctly.

Sell your rental property to us!

If you are ready to get your property sold quickly and are interested in bypassing the common pitfalls of doing so, SoCal Home Buyers is standing by to help. We are committed to helping you sell the home 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 property 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 property behind you.

Use a 1031 exchange in California

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

  • After your home sale, you must purchase another 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 property. 
  • You must close on the replacement property within 180 days of the original rental property’s closing.

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

Pass the ownership and use test

If you want to sell your rental property and it was your primary residence for at least some of the time that you owned it, the government will grant you a deduction on your capital gains tax 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 primary 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 property 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. Give us a call at 951-331-3844—or fill out the short form below—to request your fair cash offer.
  2. Await our prompt response to discuss your property in greater detail and schedule a one-time inspection that allows us to offer the highest amount possible.
  3. At the time of the inspection, our in-house inspector will quote you a fair cash offer, and if you’re on board, you can consider your home sold!
  4. Choose your closing date, and leave the rest to us. You can choose payment via check or wire transfer. It simply doesn’t get any easier.
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FAQs

How long do I have to live in my rental property to avoid capital gains?

Only those who own their properties for at least a year and who earn no more than $44,625 in taxable income can completely avoid capital gains. You can defer your capital gains tax, however, if the property was your primary residence for at least 2 of the previous 5 years.

If you sell a rental property, how long do you have to reinvest?

If you want to reinvest after selling a rental property by taking advantage of the 1031 exchange tax code, you must purchase your property and identify it as a replacement property within 45 days of closing on your original rental investment and must close on the reinvestment within 180 days.

What are the allowable expenses when selling a rental property?

If you’re a landlord who is ready to sell a rental property, there are certain expenses you’re allowed to deduct, which can decrease the amount that will be taxed. The kind of expenses allowed by the IRS generally include:

-Appraisal fees
-House inspections
-Title and transfer fees
-Relevant legal fees
-Property taxes
-Mortgage interest

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