California Capital Gains Tax on Real Estate

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does California have a capital gains tax?

California has no separate capital gains tax, but it taxes every dollar of capital gain as ordinary income. The Franchise Tax Board (FTB) treats a gain on an apartment building the same way it treats a salary, so the rate depends on your total California taxable income for the year, from 1% up to 12.3%, plus the 1% Behavioral Health Services Tax on income above $1 million.

That makes California the most expensive state in the country for a large real estate gain. A sale that produces a seven-figure gain pushes most of it into the 11.3% and 12.3% brackets, and the slice above $1 million pays 13.3%. Holding the building for 20 years instead of 2 makes no difference to the state rate.

California capital gains tax rates and brackets

California’s 2026 rate schedules were not yet posted by the FTB in October 2026, so the table below shows the 2025 schedules, the latest published. The rates themselves (1% through 12.3%) have not changed in years; only the income thresholds move with inflation each year.

Read the table by finding where your total taxable income, including the gain, ends up. Each rate applies only to the income inside its band, but on a large sale most of the gain sits in the top two bands.

The extra 1% on income over $1 million

California adds a 1% Behavioral Health Services Tax on taxable income above $1,000,000, and a building sale is one of the most common ways an owner crosses that line. It was formerly called the Mental Health Services Tax and is figured on line 62 of Form 540.

The $1 million threshold is the same for single and joint filers. A couple with $250,000 of ordinary income who books a $1,230,000 gain lands at $1,480,000 of taxable income, so $480,000 of it pays the extra 1%, or $4,800. That is small next to the bracket tax, but it pushes the true top rate to 13.3%.

How California tax stacks with federal capital gains tax

You owe California tax and federal tax on the same gain, and the two systems work differently. The IRS gives long-term gains lower rates, while California taxes the full gain at ordinary rates.

For 2026, Revenue Procedure 2025-32 sets the federal long-term capital gains rates at 0% up to $98,900 of taxable income on a joint return ($49,450 single), 15% up to $613,700 ($545,500 single) and 20% above that. The part of your gain that came from depreciation is unrecaptured Section 1250 gain, taxed federally at up to 25%. The 3.8% net investment income tax applies once modified AGI passes $250,000 joint or $200,000 single.

Put together, a California owner with a large gain faces a top combined marginal rate of about 37% on the appreciation (20% plus 3.8% plus 13.3%) and up to about 42% on the depreciation portion (25% plus 3.8% plus 13.3%). Few other states come close.

California real estate withholding at closing (Form 593)

California requires escrow to withhold 3 1/3% of the total sales price on most real estate sales over $100,000 and send it to the FTB with Form 593. Unlike nonresident withholding rules in other states, California’s rule under Revenue and Taxation Code 18662 applies to residents and nonresidents alike, unless the seller certifies an exemption.

The money is a prepayment, not a separate tax. It shows up as a credit on your California return for the year of sale, and any excess comes back as a refund. Escrow, the title company or another real estate escrow person must get the form and payment to the FTB by the 20th day of the month after the month escrow closes.

You can choose between two methods. The standard method is 3 1/3% of the price. The alternative method applies a flat rate to your estimated gain: 12.3% for individuals and trusts, 8.84% for corporations and 13.8% for S corporations. Sellers with a high basis often choose the alternative because it withholds less; sellers with a low basis usually stay with 3 1/3%.

Depreciation recapture in California

California does not have a separate recapture rate. The depreciation you claimed lowers your basis, which raises your gain, and California taxes that extra gain at the same ordinary rates as the rest of it.

In practice that means the depreciation slice of a California sale is taxed at up to 13.3% by the state and up to 25% by the IRS. If you ran a cost segregation study and took bonus depreciation on appliances, flooring or site work, the federal recapture on those components is at ordinary rates under Section 1245, while California still treats the whole amount as ordinary income. The depreciation recapture calculator estimates the federal side.

Worked example: selling a $2 million apartment building in California

Here is a married couple, both California residents, selling a 14-unit building in Sacramento County for $2,000,000 in 2026. They bought it in 2012 for $1,000,000 and have claimed $350,000 of depreciation. Selling costs are $120,000. Their other taxable income is $250,000.

Their gain is $1,230,000. Federally, we apply 25% to the $350,000 of depreciation (a simplification, since part of it may fall in lower brackets), 15% to the $13,700 of appreciation that still fits under the $613,700 line, 20% to the remaining $866,300 and 3.8% NIIT to the whole gain. That comes to $309,555.

For California, we ran the couple’s taxable income through the 2025 joint schedule with and without the sale. The sale raises their California tax from about $16,100 to about $148,600, an increase of $132,445 including $4,800 of the 1% tax over $1 million. Together, the two governments take about $442,000, roughly 36% of the gain.

At closing, escrow would withhold $66,667 (3 1/3% of $2,000,000) toward the California bill. The alternative method would be 12.3% of $1,230,000, or $151,290, so this couple sticks with the standard method and pays the rest with their return.

How a 1031 exchange changes California capital gains tax

A 1031 exchange defers the California tax along with the federal tax. California conforms to Section 1031 for real property, so if the couple above buys a replacement worth $2,000,000 or more and reinvests all their net proceeds, the $442,000 is not due in 2026, and no Form 593 withholding is taken at the first closing.

California keeps a claim on that deferred gain, though. If the replacement property is in another state, you must file Form FTB 3840 every year until the deferred California gain is taxed, and California collects when you later sell in a taxable sale, even if you have moved away. Our page on the 1031 exchange in California covers the FTB 3840 filing and how the intermediary handles withholding on boot.

Short-term and long-term gains in California

California taxes short-term and long-term gains the same way, as ordinary income on Form 540. The holding period only matters on your federal return, where a building held one year or less is taxed at federal ordinary rates up to 37% instead of the 0%, 15% and 20% capital gains rates.

So the familiar advice to wait past the one-year mark still saves federal tax, but it does nothing for the California bill. Losses work the same way as federally: capital losses from other investments offset the building gain on the California return, which is one reason some sellers harvest stock losses in the year they sell.

Other ways to lower the California tax on a sale

Timing and structure are the main tools besides an exchange. An installment sale, where you carry a note and collect principal over several years, spreads the gain across those years. Because California’s brackets are steep and the 1% tax only bites above $1 million of taxable income in a single year, spreading a $1.2 million gain over three or four years can keep each year under that line and out of part of the 12.3% band.

With an installment sale, Form 593 withholding follows the payments: escrow withholds on the down payment, and the buyer withholds on the principal part of each later payment, instead of escrow taking it all up front. Selling in a year when your other income is low has a smaller but similar effect. Neither approach changes the federal recapture rules, so model both returns before you agree to terms.

Moving out of California before you sell

Moving to Nevada or Texas before the sale does not remove California tax on a California building. Gain from California real property is California-source income, so a nonresident files a California nonresident return and pays tax on it, and escrow still withholds under Form 593.

Where a move can help is on other income. A nonresident pays California tax only on California-source income, though the rate is set by reference to total income. The capital gains tax calculator gives a quick federal estimate; your CPA can work out what residency changes on the state side.

Selling a California apartment building to Skyline

Skyline buys apartment buildings with five or more units in California, from the Central Valley to Southern California. We buy directly, close on your timeline, and can work inside 1031 deadlines. If your building is under a local rent ordinance, our guide to selling a rent-controlled building in California explains how we underwrite it. When you want to exchange, we can set a closing date that leaves time to identify a replacement, and we coordinate with your intermediary on the Form 593 paperwork.