Capital Gains on Investment Property

Investment property, including raw land, commercial buildings, and multifamily assets, is subject to capital gains tax when sold for more than its adjusted basis. Unlike a primary residence, investment property does not qualify for the Section 121 exclusion, so the full gain is exposed to tax unless the investor defers it through a Section 1031 exchange. Orange County investors holding commercial parcels in Irvine, Costa Mesa, and Newport Beach often accumulate significant unrealized gain over a holding period measured in decades, driven by both market appreciation and low starting basis.

The federal long term capital gains rate on investment property tops out at 20 percent for investors in the highest bracket, with an additional 3.8 percent net investment income tax applying above certain income thresholds. If the property included depreciable improvements, the portion of gain attributable to depreciation is taxed separately as unrecaptured Section 1250 gain at up to 25 percent federally. California adds its own layer, taxing the full gain, including any depreciation recapture, as ordinary income at rates reaching 13.3 percent, with no distinction between short term and long term holding periods.

Because investment property is held for business or investment purposes rather than personal use, it is generally eligible for 1031 exchange treatment as long as the replacement property is also real property held for investment or business use. Orange County investors weighing a sale should calculate the combined federal and state tax exposure before setting a listing price, since the after-tax proceeds from an outright sale can be meaningfully lower than the equity available to reinvest through an exchange.