Capital gains tax on rental property in California: 2026 rates and a Sacramento example

Capital gains tax on a California rental at a glance (2026)

How capital gains on a rental property are figured

The tax starts with one subtraction: what you sold for, less your adjusted basis. Everything else on this page is about how that gain gets split up and which rate hits each piece.

Adjusted basis on a rental property

Your basis starts as what you paid for the house plus the buying costs you didn't deduct (title, recording, transfer tax you paid as buyer). Add capital improvements such as a new roof, an addition or a replaced HVAC system. Then subtract every dollar of depreciation you took, or were allowed to take, over the years you rented it. IRS Publication 551 says that if you didn't claim depreciation, you still reduce the basis by the full amount you could have taken.

Amount realized and the capital gain

The amount realized is the sale price less your selling expenses: commission, escrow and title charges you pay, transfer tax and legal fees. Gain is the amount realized minus the adjusted basis. If you held the house more than a year, the gain is long-term. The line items that come off the price are covered in the Sacramento rental selling costs guide.

Why depreciation makes the capital gain bigger

Depreciation cut your taxable rent every year, and it also lowered your basis. So a house you sell for exactly what you paid still shows a gain equal to the depreciation. That part is taxed differently, which is the next section.

Federal capital gains rates on rental property in 2026

For tax years beginning in 2026, the IRS set these long-term capital gains breakpoints in Rev. Proc. 2025-32. They apply to taxable income, with the gain stacked on top of your other income.

Unrecaptured section 1250 gain at up to 25%

The part of the gain that equals the depreciation on the house is unrecaptured section 1250 gain. IRS Topic 409 caps its rate at 25%, and it's taxed at your ordinary rate if that's lower. A couple in the 22% bracket pays 22% on it, which is what happens in the Sacramento example below. The full recapture math, including appliances and carpet, is in the depreciation recapture guide.

Net investment income tax (NIIT) of 3.8%

IRS Topic 559 adds 3.8% on the smaller of your net investment income or the amount your modified adjusted gross income exceeds $250,000 (married filing jointly), $125,000 (married filing separately) or $200,000 (single or head of household). Gain on a rental counts as investment income for most landlords. A one-time sale is often what pushes an otherwise ordinary household over the line, so check it even if you've never paid it. It's figured on Form 8960.

California capital gains tax on a rental: taxed as ordinary income

The Franchise Tax Board says it plainly: California has no lower rate for capital gains, and all capital gains are taxed as ordinary income. The depreciation part, the rest of the gain and your wages all go through the same brackets.

California brackets that apply to the capital gain

FTB had posted its 2025 rate schedules but not the 2026 ones as of October 2026, so the example here uses 2025. For a married couple filing jointly, 2025 taxable income from $145,448 to $742,958 is taxed at 9.3%, then 10.3%, 11.3% and 12.3% at the top. For single filers, 9.3% starts at $72,724 and 12.3% starts at $742,953. Most Sacramento landlords selling one house land in the 9.3% band for most of the gain.

Behavioral Health Services Tax over $1 million

The state adds 1% on taxable income over $1,000,000. FTB's 2026 estimated tax instructions now call it the Behavioral Health Services Tax (it was the Mental Health Services Tax). With the 12.3% top bracket, that makes 13.3% the highest rate on a very large gain.

FTB Form 593 withholding is a prepayment

At closing, escrow usually withholds 3⅓% of the sale price and sends it to the FTB on Form 593. It's a credit on your California return, so it counts toward the tax, and you get back anything that's more than you owe. You can elect an alternative amount figured on your estimated gain (12.3% of the gain for an individual), which only helps when the gain is small. A rental that was last your main home, a sale at a loss and a 1031 exchange can be exempt.

Capital gains on a Sacramento rental property: a full example

These are assumptions, labelled, so you can swap in your own. A married couple bought a Sacramento rental in 2014 for $260,000 plus $4,000 of buying costs and allocated 25% to the land. They sell it in 2026 for $470,000, about the city's typical value of $470,552 in Zillow's September 2026 figures. They file jointly and have $120,000 of other federal taxable income and $140,000 of California taxable income.

Federal tax on the Sacramento capital gain

The $86,400 of depreciation stacks on their $120,000 of other income and sits entirely in the 22% bracket, so it costs $19,008 (22% is below the 25% cap). The remaining $178,000 lands between $206,400 and $384,400 of taxable income, all inside the 15% band, for $26,700. Federal income tax on the sale: $45,708.

NIIT on the Sacramento capital gain

Their modified AGI rises from about $152,200 to $416,600. The excess over $250,000 is $166,600, which is less than the gain, so the NIIT is 3.8% of $166,600: $6,331.

California tax on the Sacramento capital gain

Adding $264,400 to $140,000 takes California taxable income to $404,400. On the 2025 joint schedule, tax rises from $5,968 to $30,486: $24,518, or 9.3% on almost every dollar of the gain.

Total capital gains bill and the Form 593 credit

All in, about $76,557, or 29% of the gain. The state's share is about 54% of the federal income tax figure. Escrow withholds 3⅓% of $470,000, which is $15,651, so roughly $8,867 more is due to the FTB with the return or through estimated payments. That gap surprises people who assumed the withholding was the state tax.

Run your own version before you list with the rental property capital gains calculator. The rent vs sell calculator compares the after-tax sale with keeping the house.

How to avoid or defer capital gains tax on rental property

Nothing legal makes the gain vanish while you're alive and cashing out. These tools defer it, shrink it or move it, and each has a catch.

1031 exchange to defer the capital gain

Sell the rental and buy another investment property through a qualified intermediary within the 45-day and 180-day deadlines, and the federal and California tax are deferred into the new property. The catch is that you stay a landlord. The rules and California's out-of-state reporting are in the 1031 exchange California guide.

Installment sale to spread the capital gain

If you carry the buyer's loan, you report the gain as payments come in (IRS Publication 537). Depreciation recapture taxed as ordinary income must be reported in the year of sale, and the FTB withholds on each later principal payment unless you elect out. The risk is a buyer who stops paying.

Section 121 for a rental that used to be your home

If you lived in the house as your main home for two of the five years before the sale, up to $250,000 of gain ($500,000 for most couples) can be excluded. Depreciation after May 6, 1997 is still taxed, and under the nonqualified use rule in IRS Publication 523, gain tied to rental years after 2008 can't be excluded, except rental time after you moved out within the five-year window. If you're deciding whether to rent out your old home, read rent or sell your house first.

Step-up in basis: no capital gain for heirs

Under IRS Publication 551, heirs generally take a basis equal to the value at death, which wipes out the built-up gain and the depreciation. In California, a married couple's community property can get a new basis on the whole house when one spouse dies. Selling an inherited Sacramento rental soon after often produces little or no gain.

Offsetting the capital gain with losses

Capital losses from stocks or other sales offset the gain. Passive losses the rental couldn't use in earlier years are generally released in full when you sell your entire interest to an unrelated buyer (IRS Publication 925). Ask your CPA for that carryforward figure; it can be large on a house that ran at a paper loss for years.

If the replacement is in another state, read exchanging a California rental into another state. A house acquired through an exchange has its own five-year rule, covered in converting a 1031 rental to a primary residence.

Selling a rental property at a loss: no capital gains tax

If the amount realized is below your adjusted basis, there's no gain to tax. Because rental property is section 1231 property, a net section 1231 loss is an ordinary loss under IRS Publication 544, which is more useful than a capital loss capped at $3,000 a year. You can also certify a loss on Form 593 and avoid the 3⅓% withholding, but the FTB won't accept a loss claimed because you got no cash or think the price is low. In Sacramento, where the typical value is still about 9% below its July 2022 peak, owners who bought near that peak should run this math.

Capital gains checklist before you sell your Sacramento rental

This is general information, not tax advice, and your numbers will differ. Ask a CPA to run your actual return before you list. Bring these:

1. The closing statement from when you bought, and receipts for improvements.
2. Depreciation schedules from your past returns (federal and California can differ).
3. An estimate of the sale price and selling costs.
4. Any passive loss carryforward on the rental.
5. Your expected 2026 income without the sale, for the NIIT and bracket math.
6. Whether you want another rental (1031) or to be done (sale).

For a sale price built from recent comparable sales, Justin can value the house, and the site's guide to selling a Sacramento rental covers the rest of the decision.

Capital gains on rental property: questions Sacramento owners ask

Sources

• IRS Rev. Proc. 2025-32: 2026 inflation-adjusted items, including capital gains rate amounts
• IRS Topic 409: Capital gains and losses
• IRS Topic 559: Net investment income tax
• IRS Publication 527: Residential rental property
• IRS Publication 544: Sales and other dispositions of assets
• IRS Publication 551: Basis of assets
• IRS Publication 523: Selling your home (nonqualified use)
• IRS Publication 537: Installment sales
• IRS Publication 925: Passive activity and at-risk rules
• FTB: Capital gains and losses
• FTB: 2025 California tax rate schedules
• FTB: Tax calculator, tables, rates
• FTB: 2026 Form 540-ES instructions (Behavioral Health Services Tax)
• FTB: 2026 Form 593 instructions, real estate withholding