California taxes real estate differently from almost every other state, and the differences are large enough to change how much money you keep when you buy, sell, inherit, or invest. The state has no separate, lower rate for long-term capital gains, so a profit on a property sale can be taxed as ordinary income at rates reaching 13.3 percent, on top of whatever you owe the federal government. At the same time, California gives homeowners some of the strongest property-tax protection in the country through Proposition 13. Understanding both sides of that picture is the difference between a smart, well-timed transaction and an expensive surprise.
This guide walks through the major California real estate taxes as they stand in 2026: how your annual property tax works and why it rarely jumps, how capital gains are taxed when you sell, how a 1031 exchange lets investors defer that tax, and the extra rules that apply to inherited and investment property. Each section links to a deeper article, and where a decision maps to something we help clients with directly, we point you to the right place.
Property tax: Proposition 13 and Proposition 19
Your yearly property tax bill in California is governed by Proposition 13, passed in 1978. It sets the base tax rate at 1 percent of a property's assessed value and, just as importantly, caps how fast that assessed value can rise: no more than 2 percent per year, regardless of how much the market value climbs. Your assessed value only resets to full market value when the property changes ownership. That is why a longtime owner and a brand-new buyer can live in identical houses on the same street and pay wildly different tax bills.
Proposition 19, effective in 2021, changed the rules for two situations: transferring your tax base when you move, and inheriting property from a parent. Homeowners who are 55 or older, severely disabled, or victims of a wildfire or natural disaster can carry their low assessed value to a replacement home anywhere in California, up to three times. Inherited property, on the other hand, lost most of its old protection. A child who inherits a parent's home now has to move in as their own primary residence within one year to keep the low tax base, and even then the protected amount is capped. Inherited rentals and vacation homes are reassessed to full market value immediately.
We cover the assessed-value mechanics, the 2 percent cap, and the inheritance rules in detail in Prop 13 and Prop 19 explained. If you are 55 or older and thinking about moving, our Prop 19 tax-base transfer guide shows how the portability benefit works in your region, and our Prop 19 calculator estimates your savings.
Capital gains tax when you sell
When you sell a property for more than your adjusted cost basis, the profit is a capital gain. Federally, long-term gains on property held more than a year are taxed at 0, 15, or 20 percent depending on your income, with an additional 3.8 percent net investment income tax for higher earners. California adds its own tax, and here is the part that catches people: the state has no preferential capital gains rate. It taxes the entire gain as ordinary income, at rates that climb to 13.3 percent for the highest earners.
Homeowners get meaningful relief on a primary residence. Under Section 121 of the federal code, which California follows, you can exclude up to 250,000 dollars of gain if you are single, or 500,000 dollars if you are married filing jointly, as long as you owned and lived in the home for at least two of the five years before selling. For a majority of home sellers, that exclusion wipes out the tax entirely. The exclusion does not apply to investment or rental property, which is where a 1031 exchange becomes valuable.
The full mechanics, including how to calculate your basis and which improvements count, are in capital gains tax on a California home sale. If you are selling an inherited property, see our inherited-house guide, and use the net proceeds calculator to estimate your walk-away amount.
Deferring tax with a 1031 exchange
Real estate investors have a powerful tool that homeowners selling a residence do not: the 1031 like-kind exchange. It lets you sell an investment property and reinvest the proceeds into another investment property while deferring all of the capital gains tax and depreciation recapture, potentially indefinitely. The rules are strict. You have 45 days from the sale to identify the replacement property and 180 days to close, and you cannot touch the proceeds in between; a qualified intermediary holds them.
California adds a wrinkle. If you exchange a California property for one in another state, the state keeps a claim on the deferred gain and requires you to file Form FTB 3840 every year to track it. When you eventually sell that out-of-state property without another exchange, California collects its share, even if you have moved away. A newer law, Assembly Bill 1611, also restricts corporations that own 50 or more homes from using 1031 exchanges, a sign of the state's tightening focus on investment property.
Our dedicated article, the 1031 exchange in California, covers the timeline, the intermediary rule, and the clawback in full. If you own rental property and are weighing an exchange, our guide for landlords ready to sell and the 1031 deferral calculator are the practical next steps.
Investment property: depreciation recapture and more
Investment property carries tax consequences that a primary residence does not. While you own a rental, you depreciate the building over 27.5 years, which reduces your taxable income each year. When you sell, the government recaptures that benefit: all the depreciation you claimed is taxed, federally at a rate up to 25 percent, and by California at your full ordinary rate with no special cap. This depreciation recapture is often the most overlooked number in a sale, and it can be substantial on a property held for many years.
Investment property also opens up strategies that a residence does not, from 1031 exchanges to holding real estate inside a self-directed IRA. Each of those has its own tax rules worth understanding before you commit. We break down recapture and the broader investment-property picture in depreciation recapture and investment property taxes.
Local transfer taxes worth knowing
Beyond state and federal taxes, some California cities impose their own transfer taxes on high-value sales, and they can be large. Los Angeles has Measure ULA, often called the mansion tax, which adds 4 percent on sales above 5 million dollars and 5.5 percent above 10 million dollars, applied to the entire sale price rather than just the gain. San Francisco has its own tiered transfer tax that reaches into the millions on the priciest properties. These are paid by the seller and are separate from any capital gains tax, so they belong in the math from the very start on a high-value transaction.
Bringing it together
California real estate taxes reward planning and punish improvisation. The primary-residence exclusion, the timing of a sale relative to your income, a properly executed 1031 exchange, and the Prop 19 rules for moving or inheriting can each move real money, and they interact. The right move depends on whether the property is your home or an investment, how long you have held it, your income in the year of sale, and what you plan to do next.
Serve First Realty helps California owners and investors think through the real estate side of these decisions, and the wider Ashlar Brands family can support the financing and document preparation that go with them. For the tax treatment specific to your situation, work with a qualified CPA or tax attorney. The articles linked throughout this guide go deeper on each piece.