Capital gains tax on a rental property

Congratulations on looking ahead to how your life changes will impact your taxes.

When you sell your property, you can think of it as selling two separate properties: one is your personal residence and one is the rental property.

For both, you'll calculated your adjusted basis in the property. Your adjusted basis is, essentially, the amount you paid for the property plus the cost of any capital improvements that you made to it and minus the accumulated depreciation you've taken along the way.

Then you'll calculate your proceeds from the sale -- your sales price minus any costs of the sale.

If your proceeds exceed your adjusted basis, then you'll have a capital gain. If not, you'll have a capital loss. Any loss on your rental properties can probably be claimed as a business loss, but a loss on your personal residence would not be deducted on your taxes.

Selling a personal residence comes with the possibility of excluding up to $250,000 of gain ($500,000 if both taxpayers on a joint return qualify). You can find more information about the requirements to qualify here: Tax Aspects of Home Ownership: Selling a Home 

Selling a rental property does not include any such exclusion. You'll pay capital gains taxes on your profit when you sell your rental property. Often, rental properties have accumulated losses that can be taken when the property is sold. I've linked to a couple of articles that will help explain more about this.

Tax Law for Selling Real Estate 

Selling Rental Real Estate at a Loss 

Your federal capital gain tax rate will depend on your other income as well as how long you have owned the property. That information is included here: Capital Gains and Losses 

Finally -- California does not treat capital gains the same way that the federal government does. You'll pay the same rate of income tax on your capital gains that you do on your other income. But, California DOES follow the federal rules for excluding a portion of your gain from the sale of a personal residence from your income.

Capital gains and losses - CA Franchise Tax Board 

Income from the sale of your home - CA Franchise Tax Board