What taxes will I actually pay when I sell my LA apartment building?
Four layers stack up: federal long-term capital gains at 15–20% for most sellers, depreciation recapture at up to 25% on every dollar of depreciation you took (or were allowed to take), the 3.8% net investment income tax, and California — which has no lower capital-gains rate at all and taxes the entire gain as ordinary income at rates up to 13.3%. On a long-held LA building, the combined bill routinely lands between 30% and 37% of the gain. Sellers who say "I'll just pay the tax" are usually picturing half that number.
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: buy at $800,000, take $500,000 of depreciation over twenty-five years, sell at $3M, and your taxable gain is roughly $2.7M — not $2.2M. That recaptured $500,000 slice is taxed at up to 25% federally instead of the 15–20% you expected. Second, California: most states give capital gains a break; California gives none. The gain stacks on top of your other income, and a large sale can push you into the 11.3%, 12.3%, or 13.3% brackets (the top rate includes the 1% mental-health surtax above $1M of income). Add the 3.8% NIIT for higher earners and the arithmetic gets sobering fast.
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 — retirement income, a different market, 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.
Does California have a lower rate for long-term capital gains?
No. California taxes capital gains as ordinary income with no holding-period discount — rates run from 1% up to 13.3%. It is one of the most expensive states in the country to realize a large gain.
What if I never claimed depreciation on my returns?
Recapture applies to depreciation "allowed or allowable" — the IRS taxes you as if you took it either way. A CPA can sometimes catch up missed depreciation with a Form 3115 filing before the sale, which at least gets you the deductions you are being taxed on.
How do I estimate my bill before deciding to sell?
Give your CPA the purchase price, capital improvements, and depreciation schedule; give me the address. Between the gain calculation and my net-proceeds worksheet you will know your true walk-away number within days.
SHAYA LOWENSTEIN · LYON STAHL INVESTMENT REAL ESTATE · DRE #01942326 · (323) 944-2221