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 Rental Property in California – A Comprehensive 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 — whether you’re trying to sell a rental property in San Diego Quickly, Riverside, or another part of Southern California.

We focus on helping rental property owners sell quickly, minimize tax burdens, and walk away with the best possible outcome — without the stress of listings, repairs, or drawn-out negotiations.

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

Reach out for more information today. 

Understanding Your Property’s Value in the Current Market

Before you put that “For Sale” sign up, it’s essential to get a good grasp of what your rental property is actually worth. This means taking a close look at the current real estate market and seeing how your property stacks up against similar ones that have recently sold in your area.

When comparing your property to others, pay close attention to key factors like:

• Location: A property’s location is a major factor in its value.
• Size matters: The square footage of your property, both indoors and outdoors, will influence its value.
• Age and condition: A newer or well-maintained property will generally command a higher price than an older one in need of repairs.
• Features and amenities: Does your property have a pool, garage, updated kitchen, or other desirable features? These can all add value.

Why Is Market Analysis So Important?

A thorough market analysis will help you:

• Price it right: Setting the right asking price is crucial for attracting buyers and selling within a reasonable time-frame. Overpricing can scare buyers away, while under-pricing can leave money on the table.
• Know the market: Is it a buyer’s market or a seller’s market? Understanding market trends will give you an edge in negotiations.
• Make smart decisions: Market data can help you decide whether it’s worth investing in renovations or repairs to increase your property’s value before selling.

Do It Yourself or Hire a Pro?

You can do some basic market research yourself using online resources like Zillow or Redfin. However, for a more in-depth analysis, consider hiring a professional appraiser or an experienced real estate agent. They have access to more detailed market data and can provide valuable insights.

When to Sell Your California Property: Maximize Your Sale Price with the Right Market Timing

The timing of your rental property sale can significantly impact the final price you achieve. In California’s dynamic housing market, understanding current trends and seasonal fluctuations is crucial.

California’s Housing Market Trends

To understand when to sell, you must consider the specifics of your local market. It’s not just about what’s happening in the state as a whole.

• Research Local Conditions: Start by getting granular. What are interest rates doing in your area? How many similar properties are on the market? Is the local economy booming or slowing down? These are the questions that will give you a sense of buyer demand and potential property values.

• Monitor Market Cycles: California’s real estate market isn’t static. It ebbs and flows. Understanding these cycles – the periods of growth and contraction – allows you to anticipate when the market might be most favorable for sellers. It’s about catching the wave at the right time.

• Consider Economic Indicators: Beyond the immediate real estate market, keep an eye on broader economic indicators. Job growth, consumer confidence, and inflation all play a role in buyer behavior. If the economy is strong, people are more likely to invest in property.

Seasonal Trends and Selling Price

While local market conditions are paramount, you can’t ignore the impact of seasonal trends. There are times of the year when buyers are simply more active.

• Spring: Generally, spring (March to May) is considered the most favorable time to list a property in California. Buyers tend to be more active during this season, leading to increased competition and potentially higher offers.

• Summer: Summer months can also be a good time to sell, but buyer activity may slow down slightly due to vacations.

• Fall and Winter: Fall and winter months typically see a decrease in buyer activity. However, serious buyers may be more motivated during these seasons, potentially leading to faster sales.

• Tailoring to Your Area: Remember, California is diverse. Mountainous regions with heavy snowfall will see a more pronounced winter slowdown than sunny Southern California. Be sure to consider your specific location’s climate and its effect on the market.

Property Evaluation and Repairs

Assessing the condition of your rental property is a critical step in the selling process. A pre-listing inspection can identify any necessary repairs or potential issues that could deter buyers or lead to price reductions. While selling “as-is” to an investor is an option, addressing major repairs beforehand can often increase your property’s appeal and potentially lead to a higher selling price.

Consider the following when evaluating your property:

• Structural integrity: Check for foundation issues, cracks, roof leaks, or any signs of water damage.
• Systems: Inspect the plumbing, electrical, heating, and cooling systems for proper functioning.
• Cosmetic condition: Address any necessary painting, flooring repairs, or landscaping to enhance curb appeal.
• Safety: Ensure smoke detectors, carbon monoxide detectors, and other safety features are in working order.

Prioritize repairs based on their impact on the property’s value and your budget. While some minor cosmetic issues might be acceptable, addressing major structural or system problems is generally recommended.

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.

1. Selling Your Rental Property to Your Current Tenants

Selling investment property 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 is finalized.

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.

2. 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.

3. 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, whether you’re managing a tenant-occupied unit in San Bernardino or handling an older property that needs repairs, regardless of condition or occupancy.

Many sellers we work with choose this route to sell their San Bernardino rental property fast, without listing delays.

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. This can be especially helpful if you’re trying to sell your rental property in Riverside County, where rental demand is high but tenant coordination can be tricky.

If your tenants are on a month-to-month lease, this could simplify the transition, allowing more flexibility in the sale process.

However, it’s important to manage the tenant relationship and lease agreements carefully throughout the sale. Here are key considerations for managing tenants during a sale:

• Lease terms: Carefully review the lease agreement to understand the tenants’ rights and obligations. This includes notice periods required for termination, rent increases, or other changes in tenancy. California law has specific requirements for landlord-tenant relationships, so ensure you are complying with all applicable laws.
• Showings: Coordinate with tenants to schedule showings at convenient times, respecting their privacy and minimizing disruption to their lives. California law provides tenants with the right to “quiet enjoyment” of their home, so it’s important to balance the need for showings with your tenants’ right to peaceful occupancy.
• Lease transfer: If possible, work with the buyer to transfer the existing lease to them. This provides continuity for the tenants and ensures ongoing rental income for the new owner. Make sure the lease transfer process is clearly communicated to the tenants and complies with all legal requirements.
• Vacating the property: If the buyer requires the property to be vacant, provide tenants with proper written notice according to California law. If necessary, and as a last resort, initiate eviction procedures, ensuring strict compliance with all legal requirements for eviction in California.

California’s Tenant Protection Laws: Key Considerations for Sellers

California has some of the strongest tenant protection laws in the country. As a seller, you must be particularly mindful of these regulations.

Tenant Relocation Assistance

If the buyer intends to occupy the property, the seller may be required to provide tenant relocation assistance. This is particularly true under local “just-cause” eviction ordinances, which often mandate financial compensation to tenants when they are required to move due to the owner or a qualified relative moving in. Make sure to research local ordinances in the city the property resides in, as these laws vary.

Notice Requirements

California law imposes strict notice requirements. Specifically, if a tenant has resided in the property for more than one year, a 60-day written notice is required to terminate the tenancy. It is very important to make sure that all notices are delivered properly and in accordance with the law. Failure to adhere to these notice periods could result in legal complications and delays in the sale process.

Sell Your House with Tenants with SoCal Home Buyers

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.

If your rental property is empty, working with us can help you bypass the delays of traditional listings. We specialize in purchasing rental properties quickly, whether you’re selling a house in a competitive market like Orange County or a quieter neighborhood, and we often close within just 7 days.

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. For rental owners in high-value markets like Los Angeles, those expenses — such as appraisal fees, inspections, and transfer fees — can make a big difference in reducing taxable gain and improving your final return.

We’ve guided countless investors through the process of selling a rental property in Los Angeles without the stress of agent fees or delays.

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 gain.

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 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.

California’s Net Investment Income Tax (NIIT) for High-Income Earners

In addition to the standard capital gains tax, high-income earners may also be subject to a 3.8% surtax on the net investment income derived from the sale of investment properties. This additional tax applies to those with higher adjusted gross incomes, further impacting the overall tax burden when selling rental property. Therefore, when estimating potential tax liabilities, high income earners must also factor in the NIIT.

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: 

Capital Gains Tax: Short-Term vs. Long-Term

To further clarify the tax implications, here’s a chart comparing short-term and long-term capital gains:

Feature	Short-Term Capital Gains	Long-Term Capital Gains
Holding Period	Less than 1 year	More than 1 year
Tax Rate	Taxed as ordinary income (10% to 37%)	0%, 15%, or 20% (depending on income)
Tax Burden	Generally higher	Generally lower

How to Sell a 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 in California allow you to avoid both forms of tax until you sell your new rental.

Important Consideration: Property Tax Reassessment

It’s crucial to understand that while a 1031 exchange defers federal and state capital gains taxes, it does not prevent potential property tax reassessment. 

Specifically, if the buyer of your replacement property (the one you acquired through the 1031 exchange) uses it as their primary residence, it may trigger a reassessment under California’s Proposition 13. This could lead to a significant increase in property taxes for the new owner, based on the current market value rather than the previously assessed value. 

Therefore, it is important to understand the potential impact of proposition 13 during a 1031 exchange.

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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