What taxes will I actually pay when I sell my LA apartment building?
Four taxes can reach the gain on an LA apartment building held more than a year. Federal long-term capital gain is taxed at 0%, 15% or 20% depending on taxable income, and the part of the gain equal to past straight-line depreciation, called unrecaptured section 1250 gain, at a maximum of 25%. The 3.8% net investment income tax applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 for a single filer or $250,000 for a joint return. California has no lower rate for capital gains and taxes the whole gain as ordinary income, at up to 12.3% plus a 1% Behavioral Health Services Tax on taxable income over $1,000,000. A 1031 exchange defers the gain if the replacement property is identified within 45 days and received within 180 days or by the return's due date, whichever is earlier. It defers all of it only if no money or other non-like-kind property comes out of the exchange, because cash you receive, and debt you are relieved of without taking on new debt or adding cash, is taxed.
Answered by Shaya Lowenstein, a Los Angeles multifamily broker at Lyon Stahl Investment Real Estate, CA DRE 01942326, with 15 years in apartment buildings and land across Los Angeles County. His closed sales are published with addresses and recording dates, so anything claimed here can be checked against the county record.
| Tax | Rate | What it applies to |
|---|---|---|
| Federal long-term capital gain | 0%, 15% or 20% | Gain on property held more than one year, by taxable income |
| Unrecaptured section 1250 gain | Up to 25% | The part of the gain equal to straight-line depreciation on the building |
| Net investment income tax | 3.8% | The lesser of net investment income or MAGI above $200,000 (single) or $250,000 (married filing jointly) |
| California income tax | 1% to 12.3% | The entire gain, taxed as ordinary income |
| California Behavioral Health Services Tax | 1% | Taxable income over $1,000,000 |
Source: IRS, Topic no. 409, Capital gains and losses; IRS, Topic no. 559, Net investment income tax; Franchise Tax Board, Capital gains and losses; Franchise Tax Board, 2025 California Tax Rate Schedules; Franchise Tax Board, 2025 Form 540 Booklet (line 62, Behavioral Health Services Tax)
| Step | Deadline, counted from the day you transfer the property you are giving up |
|---|---|
| Identify replacement property in writing | Within 45 days |
| Receive the replacement property | By the earlier of the 180th day or the due date, including extensions, of your return for the year of the transfer |
Source: IRS, Publication 544, Sales and Other Dispositions of Assets
Why the bill is bigger than sellers expect.
Two surprises do the damage. First, the gain is measured from your depreciated basis, not what you paid. Basis goes down by the depreciation allowed or allowable, whether or not you claimed it. Buy at $800,000, take $500,000 of depreciation over twenty-five years, sell at $3,000,000, and your taxable gain is about $2,700,000, not $2,200,000. That $500,000 slice is taxed at up to 25% federally instead of the 15% or 20% you expected. Second, California has no lower rate for capital gains. The gain stacks on top of your other income, and a large sale can push you into the 12.3% bracket plus the 1% tax on taxable income over $1,000,000. Added together at the top brackets, and before any deduction one return allows for the other, the federal and California rates reach 37.1% on the appreciation (20% + 3.8% + 13.3%) and 42.1% on the depreciation slice (25% + 3.8% + 13.3%).
How depreciation recapture gets large.
Residential rental buildings are depreciated over 27.5 years, and land is never depreciated. Take a building bought for $2,000,000 with $1,400,000 allocated to the improvements. Straight-line over 27.5 years is about $50,909 a year of deductions, which sheltered rental income every year. Hold twenty years and you have taken about $1,018,000, so your basis has dropped by that much, and that amount comes back at sale as unrecaptured section 1250 gain. At the 25% federal maximum that is up to about $254,500 of federal tax on that slice alone, before California and the net investment income tax, and before the ordinary capital gain on the appreciation is even counted. The deduction was never free money; it was a loan with the balloon due at closing.
1031 exchanges, and the California claw-back.
A 1031 exchange defers the gain, recapture included, by carrying your old basis into the replacement property. Since 2018 it applies only to real property. Real properties are generally like-kind to each other whether improved or not, so an apartment building can be exchanged for another apartment building or for land, but US real estate is not like-kind to real estate abroad. The money must stay with a qualified intermediary, because receiving it ends the exchange. Meeting the deadlines is not the same as deferring everything. IRS Publication 544 taxes the gain to the extent of any money and the fair market value of any non-like-kind property you receive, and it counts a mortgage the other side takes off you as money received. That debt is offset only by debt you take on in the replacement or cash you add. So full deferral means reinvesting all of the net proceeds and replacing the debt that was paid off; whatever is kept out is taxable, and practitioners call it boot. Two clocks start the day your sale closes, as the table above shows. The 180-day leg is the one people get wrong, because it ends at the return's due date if that comes first, so a late-year sale needs an extension to keep the full 180 days. California adds a claw-back. If you exchange California property for property in another state, you must file Form FTB 3840 every year, and the California-sourced deferred gain is taxed when the replacement is eventually sold in a taxable sale. Exchanges rarely die on paperwork. They die on day 44 with no viable building identified. The fix is starting the replacement search before you list, not after you close. Because I run both sides, the sale and the replacement, my sellers walk into escrow with an identification list of real buildings, often off-market, already vetted against their debt and income targets.
Carrying the financing yourself.
Seller financing means the buyer pays you over time on a note secured by the building, and the installment method recognizes the gain as the payments arrive. Spreading it over several years can keep you out of the top brackets a lump-sum sale would reach. Three caveats your CPA will flag. IRS Publication 537 requires depreciation recapture income to be reported in full in the year of sale, whether or not a payment arrived that year. The term is narrower there than the everyday "recapture" in the section above. A building depreciated straight-line has no depreciation recapture income, as the publication's own worked example says of a section 1250 building, so its unrecaptured section 1250 gain is part of the gain reported as the payments arrive. Recapture income comes from depreciation taken faster than straight-line, or on personal property such as appliances or the shorter-lived components a cost segregation study creates, and that part is taxed in year one. If your nondealer installment obligations from the year are more than $5 million at year end, you owe interest on the deferred tax. And the note you carry is not like-kind property, so it cannot sit inside a 1031 exchange without special structuring. On terms, protect yourself the way a bank would: enough down that walking away hurts the buyer, a rate that pays you for the flexibility, professional loan servicing, and a first deed of trust, not a second. If the buyer defaults, you foreclose and take the building back in whatever condition and tenancy the buyer left it.
Know the number before you list, not after.
The tax bill is an input to the sale strategy, not an afterthought. If the after-tax proceeds don't fund whatever comes next, whether retirement income, a different market, or splitting with siblings, then the answer might be a 1031 exchange, a DST, an installment sale, or holding for the step-up in basis at death. Every one of those has to be structured before closing; none can be bolted on after. My routine on any potential listing: the seller's CPA runs the gain calculation with real basis and depreciation numbers while I run the gross-to-net on the sale side: transfer taxes, ULA if it applies, commission, payoff. Two one-page numbers, and suddenly the decision is easy to make.
EDUCATIONAL ONLY, NOT LEGAL OR TAX ADVICE. RATES, THRESHOLDS AND ORDINANCES CHANGE, AND SEVERAL OF THE FIGURES HERE DEPEND ON FACTS SPECIFIC TO YOU. CONFIRM ANYTHING YOU PLAN TO ACT ON WITH YOUR OWN ATTORNEY OR CPA, OR WITH THE AGENCY THAT SETS IT.
/// SOURCES
- IRS, Topic no. 409, Capital gains and losses
- IRS, Topic no. 559, Net investment income tax
- Franchise Tax Board, Capital gains and losses
- Franchise Tax Board, 2025 California Tax Rate Schedules
- Franchise Tax Board, 2025 Form 540 Booklet (line 62, Behavioral Health Services Tax)
- IRS, Publication 527, Residential Rental Property
- IRS, Publication 551, Basis of Assets
- IRS, Publication 544, Sales and Other Dispositions of Assets
- IRS, Like-kind exchanges: real estate tax tips
- Franchise Tax Board, 2025 Instructions for Form FTB 3840, California Like-Kind Exchanges
- IRS, Publication 537, Installment Sales
Does California have a lower rate for long-term capital gains?
No. The Franchise Tax Board states that California does not have a lower rate for capital gains and taxes all capital gains as ordinary income. The 2025 schedules run from 1% to 12.3%, and taxable income over $1,000,000 adds a 1% Behavioral Health Services Tax.
What if I never claimed depreciation on my returns?
Basis is reduced by depreciation allowed or allowable, so the IRS reduces it as if you took the deduction either way. Not claiming it is the worst of both worlds; talk to a CPA about catching up before you sell.
Can I 1031 from an apartment building into land?
Yes. The IRS says real properties are generally like-kind whether they are improved or unimproved, so apartments into land, or one building into several, all qualify. Both sides must be held for investment or business use, and US property is not like-kind to property outside the US.
What happens if I miss the 45-day deadline?
The exchange fails and the sale becomes taxable. Plan the replacement before you sell, and use a reverse exchange if you need to buy first: it costs more and needs an accommodation titleholder, but it removes the 45-day panic.
Does a 1031 exchange eliminate recapture or just delay it?
It defers it. The liability carries into the replacement property. It goes away only if the property is held until death, because an heir's basis is generally the fair market value on the date of death.
SHAYA LOWENSTEIN · LYON STAHL INVESTMENT REAL ESTATE · DRE #01942326 · (323) 944-2221