In the state of California, property owners who decide to sell an investment property are subject to the following taxes:
- 15% federal capital gains tax
- 9.55% state capital gains tax
- 25% depreciation recapture tax
Calculating the tax bill upon the sale of a property isn’t as hard as one might think, but it does require that you have a firm understanding of some basic principles. The first thing to understand is how to calculate the Adjusted Basis:
| Formula | Example |
| Net Purchase Price | $500,000 |
| (Depreciation) | ($100,000) |
| Capital Improvements | + $25,000 |
| Adjusted Basis | $425,000 |
Calculating gain is the next step to figuring out your tax bill. Let's assume we sold our property for a net sales price of $1,000,000. With that assumption we calculate gain as follows:
| Formula | Example |
| Net Sales Price | $1,000,000 |
| (Adjusted Basis) | ($425,000) |
| Gain | $575,000 |
With a computed gain of $575,000, we can now start applying the tax rates mentioned above to compute the total tax liability on the sale of the property:
| Tax | Formula | Tax Owed |
| 15% Federal Capital Gain | 15% * (Gain - Depreciation) | $71,250 |
| 9.55% State Tax | 9.55% * Gain | $54,913 |
| 25% Depreciation | 25% * Depreciation | $25,000 |
| Total Tax Bill | $151,163 |