Andres Diaz
Managing Director, Multifamily Investments · Kingside Investment Group
How Much Tax Will I Pay When I Sell My Apartment Building in California?
Most California apartment building sellers face a combined federal and state tax burden in the roughly 30% to 40%+ range on their gain when no 1031 exchange is used, depending on income bracket, holding period, and accumulated depreciation. That figure stacks four separate layers: federal capital gains tax, federal depreciation recapture capped at 25%, California state tax up to 13.3% with no preferential rate, and in many cases the 3.8% federal Net Investment Income Tax. Sales above $5,400,000 within the City of Los Angeles also owe Measure ULA, a separate transfer tax that a 1031 exchange does not defer.
Sellers routinely underestimate this number because each tax layer is easy to understand in isolation and confusing once they stack. A broker who quotes you a sale price without walking through all four layers, plus Measure ULA if it applies, is giving you an incomplete picture of what actually lands in your account after close of escrow.
This guide breaks down every layer individually, walks through a worked example on a $4 million sale, and explains exactly what a 1031 exchange defers and what it does not.
Want your actual number, not a range? Call Andres Diaz directly at (323) 376-2469 or email Andres.Diaz@kw.com for a net proceeds walkthrough on your building.
The Full Tax Stack: Every Layer at a Glance
Before getting into the mechanics of each tax, it helps to see the full stack in one place. Every apartment building sale in Los Angeles can trigger up to five separate charges against your proceeds. Not every seller owes all five. Whether each one applies depends on your income, your building's price, and whether you use a 1031 exchange.
| Tax Type | Rate | Applies To | Deferrable by 1031? |
|---|---|---|---|
| Federal long-term capital gains | 0%, 15%, or 20% (2026 brackets) | Appreciation gain above depreciated basis | Yes |
| Depreciation recapture (unrecaptured Sec. 1250 gain) | 25% federal cap | Gain equal to depreciation claimed | Yes |
| California state tax | Up to 13.3% (ordinary income brackets, no capital gains discount) | Entire gain, including recapture portion | Yes |
| Net Investment Income Tax (NIIT) | 3.8% federal surtax | Investment income above $200K (single) / $250K (MFJ) MAGI | Yes |
| Measure ULA (LA transfer tax) | 4% ($5,400,000 to $10,900,000) / 5.5% (above $10,900,000) | Full sale price of City of LA property above threshold | No, not deferrable |
The distinction in that last row is the single most important thing to understand before you list. Four of the five tax layers are income taxes on your gain, and a 1031 exchange defers all four. Measure ULA is a transaction tax on the sale itself, and no exchange structure changes that. More on why in the section on the 1031 exchange myth below.
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If you have held your apartment building for longer than one year, your gain above your depreciated basis (excluding the recapture portion, covered next) is taxed at the federal long-term capital gains rate. For the 2026 tax year, that rate is 0%, 15%, or 20%, depending on your total taxable income for the year, including the gain itself.
For single filers, the 0% bracket applies to taxable income up to $49,450, the 15% bracket runs from $49,451 to $545,500, and the 20% bracket applies above that. For married couples filing jointly, 0% applies up to $98,900, 15% runs from $98,901 to $613,700, and 20% applies above that. Because the gain from selling an apartment building is typically large relative to a seller's other income, most sellers land in the 15% or 20% bracket the moment the sale closes, even if their regular annual income would otherwise sit in a lower bracket.
One detail that catches sellers off guard: the bracket is determined by your total taxable income for the year, which includes the sale gain itself. A seller with modest W-2 income who sells a building with a $1.5 million gain will very likely be pushed into the 20% bracket for that gain, not the 0% or 15% bracket their regular income would otherwise suggest.
Depreciation Recapture: The 25% Layer Sellers Forget
Unrecaptured Section 1250 Gain
- Federal cap of 25% on gain attributable to depreciation you claimed while you owned the building
- Applies whether or not you actually took the deduction. The IRS assumes you did.
- Residential rental property depreciates on a 27.5-year schedule
- Taxed separately from, and generally higher than, your standard long-term capital gains rate
Every year you own an apartment building, the tax code lets you deduct a portion of the building's cost basis as depreciation, which reduces your taxable income while you hold the property. When you sell, that benefit gets clawed back. The portion of your gain equal to the depreciation you claimed, formally called unrecaptured Section 1250 gain, is taxed federally at a maximum rate of 25%, separate from and generally above your ordinary long-term capital gains rate.
This is the layer sellers who have owned a building for a decade or more most often underestimate. If you purchased a building for $1.2 million fifteen years ago and have claimed close to the maximum allowable depreciation, several hundred thousand dollars of your gain can fall into this 25% category before the remaining appreciation gain is even calculated at the standard capital gains rate.
There is no way around this recapture at the federal level short of a 1031 exchange or holding the property until death for a stepped-up basis. Even sellers who never actually claimed depreciation on their tax returns are still subject to recapture on the amount they were entitled to claim. Keeping accurate depreciation schedules throughout your ownership period is essential to calculating this number correctly before you list.
Not sure how much accumulated depreciation you're carrying? Call (323) 376-2469. Andres Diaz can help you gather the numbers your CPA needs before you list.
California State Tax: No Discount for Capital Gains
California is one of the few states that offers no preferential rate for long-term capital gains. Every dollar of your gain, including the portion classified federally as depreciation recapture, is added to your other income for the year and taxed under California's progressive income tax brackets. There is no California equivalent of the federal 0% or 15% capital gains rate.
California's top marginal rate is 13.3%, made up of a 12.3% top income tax bracket plus an additional 1% surcharge, formerly called the Mental Health Services Tax and now formally the Behavioral Health Services Act surcharge, on taxable income above $1,000,000. Because a large apartment building sale gain is frequently large enough on its own to push a seller's total taxable income for the year above that $1,000,000 mark, many sellers pay the full 13.3% rate on some or all of their gain, even if their normal annual income sits well below that threshold in a typical year.
Unlike the federal system, California does not separate out a lower rate for the capital gains portion versus the recapture portion. Both are simply added to ordinary income and taxed under the same bracket structure, administered by the Franchise Tax Board, topping out at that same 13.3% rate once your total taxable income for the year clears $1,000,000.
The Net Investment Income Tax (NIIT)
The Net Investment Income Tax is a 3.8% federal surtax on investment income, including capital gains from selling an apartment building, that applies once your modified adjusted gross income crosses a statutory threshold. For 2026, the threshold is $200,000 for single filers and heads of household, and $250,000 for married couples filing jointly. These thresholds are not indexed for inflation, so they have remained fixed since the tax was introduced in 2013.
The 3.8% applies to whichever amount is smaller: your total net investment income for the year, or the amount by which your modified adjusted gross income exceeds the threshold. In practice, because an apartment building sale gain is usually large relative to these thresholds, most sellers of a mid-size or larger LA building end up owing the full 3.8% on their entire investment income for the year, not just a portion of it.
This tax is easy to overlook because it does not appear as a line item most sellers are watching for. It stacks directly on top of the federal capital gains rate, meaning a seller in the 20% federal bracket effectively pays 23.8% federally on the capital gains portion of their sale once NIIT is included.
Measure ULA: A Transfer Tax, Not an Income Tax
Measure ULA Transfer Tax (LA Municipal Code Section 21.9.2)
- 4% transfer tax on sales from $5,400,000 to $10,900,000
- 5.5% transfer tax on sales above $10,900,000
- Thresholds effective for closings after June 30, 2026, per annual City of LA adjustment
- Applies to the full sale price, not just the portion above the threshold
- Paid by seller at close of escrow, regardless of 1031 exchange status
Measure ULA is fundamentally different from the four tax layers above. It is a documentary transfer tax, assessed by the City of Los Angeles on the transaction itself at the moment of sale. It has nothing to do with your income, your basis, your depreciation history, or your personal tax bracket. It applies purely based on the sale price and the property's location within City of Los Angeles boundaries.
For sales closing after June 30, 2026, the City of Los Angeles Office of Finance's threshold structure applies a 4% tax on sales from $5,400,000 to $10,900,000, and 5.5% on sales above $10,900,000. On a $6 million apartment building, that is $240,000 due at closing. On a $12 million building, it is $660,000. The tax applies to the entire sale price once you cross the threshold, not just the amount above it, which is why positioning a building just above or below $5.4 million can matter enormously to net proceeds.
Measure ULA applies only within City of Los Angeles boundaries. Properties in unincorporated LA County or in separately incorporated cities such as Culver City, Santa Monica, or Long Beach are not subject to it, so the same $6 million sale that owes $240,000 in Measure ULA inside city limits owes $0 of it just outside them, only the 4% and 5.5% brackets above the $5,400,000 threshold apply within Los Angeles proper.
Worked Example: A $4 Million Sale Below the ULA Threshold
To see how the tax layers actually stack, consider a hypothetical apartment building selling for $4,000,000. This price sits below the $5,400,000 Measure ULA threshold, so this example does not owe that tax at all, which is deliberately useful for isolating the four income tax layers that apply to nearly every seller.
| Component | Amount |
|---|---|
| Sale price | $4,000,000 |
| Original purchase price (basis before depreciation) | $1,800,000 |
| Accumulated depreciation claimed | $500,000 |
| Total gain (sale price minus depreciated basis of $1,300,000) | $2,700,000 |
| Depreciation recapture (25% of $500,000) | $125,000 |
| Federal capital gains tax (20% of remaining $2,200,000 gain) | $440,000 |
| NIIT (3.8% of $2,700,000 total gain) | $102,600 |
| California state tax (13.3% of $2,700,000 total gain) | $359,100 |
| Total tax on this sale | $1,026,700 |
In this example, the combined federal and state tax burden is $1,026,700, or roughly 38% of the total $2,700,000 gain. That figure assumes the seller is already in the top federal capital gains bracket and top California bracket, which is a reasonable assumption once a gain of this size is added to a seller's income for the year. A seller with a smaller gain or lower overall income could land in the 15% federal bracket instead of 20%, which would reduce the total meaningfully. This is precisely why a generic percentage is a starting point, not a substitute for your CPA running your actual numbers.
Notice what is absent from this example: Measure ULA. At $4,000,000, this sale falls below the $5,400,000 threshold entirely, so it owes zero dollars of Measure ULA tax. If this same building sold for $5,600,000 instead, 40% higher, it would owe both the same four income tax layers on a larger gain and an additional $224,000 in Measure ULA (4% of $5,600,000), a cost that has nothing to do with income tax planning and cannot be deferred by any exchange structure.
Want this worked example run against your actual sale price and basis? Call (323) 376-2469 or email Andres.Diaz@kw.com.
The 1031 Exchange Myth: What It Defers and What It Does Not
A 1031 exchange, authorized under Internal Revenue Code Section 1031, lets an owner of investment real property sell that property and roll the proceeds into a replacement property without recognizing the taxable gain at the time of sale. Done correctly, it defers all four of the income tax layers covered above: federal capital gains tax, federal depreciation recapture, California state tax, and the Net Investment Income Tax. In our $4,000,000 example, that means deferring the full $1,026,700 rather than paying it at closing.
The exchange runs on two fixed deadlines. You have 45 calendar days from the closing of your relinquished property to formally identify replacement property in writing, and 180 calendar days to close on that replacement. Both deadlines are set by IRC Section 1031 and its Treasury regulations, and neither can be extended by your broker, escrow officer, or intermediary short of a federally declared disaster.
Here is the myth that costs sellers real money: many assume that doing a 1031 exchange also defers or eliminates Measure ULA. It does not. Measure ULA is not an income tax on your gain. It is a documentary transfer tax under LA Municipal Code Section 21.9.2, assessed on the transaction at the moment of sale, and it is owed in cash at close of escrow regardless of whether you are exchanging into replacement property or cashing out entirely.
This means a seller doing a $7,000,000 1031 exchange within the City of Los Angeles still needs $280,000 in cash at closing to cover Measure ULA (4% of $7,000,000), even though the entire income tax portion of the sale is being deferred. That $280,000 comes directly out of the proceeds otherwise available to reinvest into the replacement property, reducing the exchange equity you have to work with. Sellers who plan an exchange without budgeting for Measure ULA in cash at closing are frequently surprised at the escrow table.
A 1031 exchange defers tax. It does not eliminate it. If you eventually sell your replacement property without doing another exchange, the deferred gain, including the depreciation recapture portion, becomes taxable at that time. The one true elimination path is holding the replacement property until death, at which point heirs receive a stepped-up basis under Internal Revenue Code Section 1014 and the deferred gain may never be recognized. A 1031 exchange also does nothing to offset Measure ULA, so before you list, see our related guide on how much the Measure ULA tax actually costs when selling an apartment building in Los Angeles.
Planning a 1031 exchange and need to budget for Measure ULA cash at closing? Call (323) 376-2469 before you list.
Other Ways Sellers Reduce Tax Exposure
A 1031 exchange is the most commonly used tool, but it is not the only one. An installment sale under Internal Revenue Code Section 453 spreads your taxable gain across the years in which you actually receive payments from the buyer, rather than recognizing it all in the year of sale. This can keep a seller out of the top federal and California brackets in any single year, though it also means carrying seller financing risk and stretching out the timeline to full liquidity.
Holding the property until death allows heirs to receive a stepped-up basis under Internal Revenue Code Section 1014, meaning the accumulated gain and depreciation recapture built up over decades of ownership can be eliminated entirely for estate planning purposes rather than merely deferred. This is not a strategy for a seller who needs liquidity now, but it is relevant for owners weighing whether to sell during their lifetime versus pass the asset to heirs.
None of these strategies, including the 1031 exchange, touch Measure ULA. If your building sells above the City of Los Angeles threshold, that transfer tax is due in cash at closing under every structure discussed here. The strategies above address the income tax layers only, and each carries its own timing rule: an installment sale spreads recognition across the years payments are actually received, while holding until death applies the stepped-up basis rule under IRC Section 1014 to eliminate the deferred gain entirely rather than merely postpone it. Every one of them requires coordination between your broker, your CPA, and in the case of a 1031 exchange, a qualified intermediary engaged before your sale closes.
Start with a Transaction-Level Tax Model
Andres Diaz models Measure ULA exposure, commissions, and payoff costs before you list, and coordinates with your CPA and qualified intermediary on the income tax side.
For a deeper walkthrough of exchange deadlines, qualified intermediaries, and replacement property options, see our related guide on how much the Measure ULA tax costs when selling an apartment building in Los Angeles. For a breakdown of whether you can avoid that tax through pricing strategy near the $5.4 million threshold, see our related guide on whether you can avoid the Measure ULA tax when selling in Los Angeles. Considering a purchase instead? Learn about our buy-side services or call (323) 376-2469.
Frequently Asked Questions
How much tax will I pay when I sell my apartment building in California?
It depends on your income bracket, how long you have owned the property, and how much depreciation you have claimed, but most California apartment building sellers face a combined federal and state tax burden in the roughly 30% to 40%+ range on their gain when no 1031 exchange is used. That includes federal long-term capital gains tax (0%, 15%, or 20% depending on income), a 25% federal cap on unrecaptured Section 1250 depreciation recapture, California state tax up to 13.3% with no preferential rate for capital gains, and in some cases the 3.8% federal Net Investment Income Tax. Sales within the City of Los Angeles above $5,400,000 also owe Measure ULA, a separate transfer tax paid at closing regardless of income tax exposure.
What is the federal capital gains tax rate on selling an apartment building?
For property held longer than one year, the federal long-term capital gains rate is 0%, 15%, or 20%, based on your taxable income for the year of sale. For 2026, single filers pay 0% up to $49,450 of taxable income, 15% from $49,451 to $545,500, and 20% above that. Married couples filing jointly pay 0% up to $98,900, 15% up to $613,700, and 20% above that. Most sellers of an appreciated apartment building land in the 15% or 20% bracket once the gain is added to their income for the year.
What is depreciation recapture and how much does it cost?
Depreciation recapture, formally called unrecaptured Section 1250 gain, is the portion of your sale gain equal to the depreciation you claimed while you owned the property. That portion is taxed federally at a maximum rate of 25%, separate from and generally higher than the standard long-term capital gains rate. It is not optional. The IRS assumes you took the depreciation whether or not you actually claimed it on your returns, so keeping accurate depreciation records matters. On a building with $500,000 of accumulated depreciation, the recapture tax alone can run up to $125,000 before any other tax layer is applied.
Does California have a lower capital gains tax rate like the federal government?
No. California is one of the few states with no preferential rate for long-term capital gains. Your entire gain, including the portion attributable to depreciation recapture, is added to your other income and taxed under California's progressive income tax brackets, which top out at 13.3% for taxable income over $1,000,000 (12.3% top bracket plus the 1% Behavioral Health Services Act surcharge, formerly the Mental Health Services Tax). There is no 0% or 15% California rate the way there is federally. Every dollar of gain is taxed as ordinary income by the Franchise Tax Board.
What is the Net Investment Income Tax and does it apply to my apartment sale?
The Net Investment Income Tax, or NIIT, is a 3.8% federal surtax on investment income, including capital gains from the sale of an apartment building, for taxpayers whose modified adjusted gross income exceeds statutory thresholds. For 2026, those thresholds are $200,000 for single filers and heads of household, and $250,000 for married couples filing jointly. If your income including the sale gain crosses that threshold, the 3.8% applies to whichever is smaller: your net investment income or the amount by which your MAGI exceeds the threshold. Most sellers of a mid-size or larger LA apartment building trigger this tax in the year they sell.
Does a 1031 exchange defer Measure ULA?
No. This is one of the most common and costly misunderstandings among LA apartment building sellers. Measure ULA is a documentary transfer tax owed at the close of escrow on the sale itself, not an income tax on your gain. A 1031 exchange defers federal and state income tax, specifically capital gains tax and depreciation recapture tax, by rolling your taxable gain into a replacement property. It does nothing to the transfer tax, which is assessed on the transaction regardless of whether you are exchanging, and is due in cash at closing from your sale proceeds. If your building sells above $5,400,000 within the City of Los Angeles, you will owe Measure ULA whether or not you do a 1031 exchange.
How does Measure ULA work and who does it apply to?
Measure ULA, City of Los Angeles Municipal Code Section 21.9.2, imposes an additional transfer tax on property sales within Los Angeles city limits. Sales from $5,400,000 to $10,900,000 owe 4%, and sales above $10,900,000 owe 5.5%, effective for closings after June 30, 2026, per the City of Los Angeles Office of Finance's annual threshold adjustment. The tax applies to the entire sale price, not just the amount above the threshold, and is typically paid by the seller at close of escrow. It applies only within City of Los Angeles boundaries, not unincorporated LA County or separately incorporated cities like Culver City or Santa Monica.
How much does a 1031 exchange actually save me in taxes?
A properly executed 1031 exchange defers 100% of your federal capital gains tax, your federal depreciation recapture tax, your California state tax on the gain, and the Net Investment Income Tax if it would otherwise apply, all at the time of your sale. On a seller facing a combined effective tax burden in the 30% to 40%+ range, that means keeping the full amount that would otherwise go to tax working as equity in a new property. The tax is deferred, not eliminated. It becomes due again if and when you sell the replacement property outside of another exchange, unless the property is held until death, at which point heirs can receive a stepped-up basis.
Can I avoid all taxes when I sell my apartment building?
You cannot avoid Measure ULA if your building sells above the threshold within the City of Los Angeles, since it applies regardless of a 1031 exchange or your personal tax situation. You can defer federal and state income tax on the gain through a 1031 exchange, which is the most widely used tool. Other approaches include installment sales under Section 453, which spread the taxable gain over multiple years, or holding the property until death so heirs receive a stepped-up basis under Internal Revenue Code Section 1014. None of these eliminate Measure ULA, and each has its own tradeoffs that should be reviewed with a CPA or tax attorney before you list.
Do I owe California tax if I move out of state before I sell?
If you sell a California property while a California resident, you owe California tax on the gain regardless of where you later move. If you complete a 1031 exchange into an out-of-state replacement property and later sell that replacement property after establishing residency elsewhere, California's Franchise Tax Board still asserts the right to tax the deferred California-source gain through its clawback provisions, tracked annually on FTB Form 3840. Moving out of state does not eliminate the state tax exposure tied to a California-origin sale.
Who should I talk to before I sell my apartment building to understand my tax exposure?
Before you list, you should have a CPA or tax attorney run an actual net proceeds projection based on your specific basis, depreciation history, and income for the year of sale, since general rate ranges do not replace individualized tax advice. Your broker's role is to model the transaction-level costs, including Measure ULA if applicable, commissions, and payoff costs, and to coordinate timing with your CPA and, if you are exchanging, your qualified intermediary. Andres Diaz at Kingside Investment Group can walk through the transaction-level math on your specific building and connect you with tax professionals experienced in LA multifamily sales.
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Andres Diaz
Managing Director, Multifamily Investments • CA DRE #01956479
Andres Diaz has closed 169 multifamily transactions totaling $336.5M and 1,700+ units across LA County. He advises LA apartment owners structuring 1031 exchanges around Measure ULA, the 45-day identification window, and California FTB clawback rules, and models net proceeds, including all applicable tax layers, before any building goes to market.
This article is provided for general informational purposes and reflects tax rates and thresholds believed accurate for the 2026 tax year as of publication. It is not tax, legal, or accounting advice. Tax outcomes depend on your individual basis, depreciation history, income, and filing status. Consult a licensed CPA or tax attorney before making decisions about the sale of your property.
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