Without a 1031 exchange, expect combined federal and California taxes of roughly 35 to 40 percent of your total gain on a significant LA multifamily sale. On a $3M gain, that's $1.05M to $1.2M in tax. A 1031 exchange defers this entirely into the replacement property's basis. Holding until death eliminates it at stepped-up basis.
The actual number depends on four variables: your filing status, total income, holding period, and how much depreciation you've taken. Here's how the math works.
Federal capital gains tax. Long-term capital gains (property held more than one year) are taxed at 0%, 15%, or 20% depending on your total income. Most LA multifamily sellers fall into the 20% bracket. Add the 3.8% Net Investment Income Tax for higher-income filers (modified AGI over $200K single / $250K married). Combined: 23.8% on most LA multifamily gains.
California state tax. California does not have a separate long-term capital gains rate — capital gains are taxed as ordinary income. For most LA multifamily sellers in the top brackets, this works out to approximately 13.3% on the gain.
Federal depreciation recapture. Depreciation you claimed on the building while you owned it gets "recaptured" at sale, taxed at a flat 25% federal rate (plus California state tax treating the recapture as ordinary income).
You bought an LA apartment building in 2005 for $1.5M. You sell in 2026 for $5M. Over 21 years, you've taken $900,000 in depreciation. You're in the top federal and California brackets.
Tax calculation:
- Federal recapture tax: $900K × 25% = $225,000
- Federal capital gains + NIIT: $3.5M × 23.8% = $833,000
- California state tax (on full $4.4M gain, treated as ordinary income): $4.4M × 13.3% = $585,200
- Total tax: approximately $1.64 million
That's roughly 37% of your $4.4M gain paid to federal and state tax. You keep $2.76M of the gain plus your original $600K basis — $3.36M net — out of a $5M sale.
A 1031 exchange defers all three tax categories — federal capital gains, California state tax, and depreciation recapture — into the replacement property's basis. You don't pay the tax at sale; you carry it forward.
In the example above, a clean 1031 with equal-or-up replacement value and debt preserves the full $1.64M tax obligation inside the new property. The deferral compounds. If you 1031 again from the replacement property, the tax keeps rolling. Many LA multifamily owners execute multiple 1031s over decades, compounding deferrals across a career.
If you hold a 1031-exchanged property until death, your heirs receive stepped-up basis on the property. The deferred tax is permanently eliminated. This is the strongest estate-planning use case for LA multifamily — particularly for owners over 65.
Trading down — replacement value or debt lower than relinquished — creates taxable "boot" equal to the difference, taxed at the tax rates above. Three common boot scenarios:
Boot is the quiet killer of exchanges that looked clean on paper. Trade equal or up to defer all tax.
Hold until death. Stepped-up basis eliminates deferred capital gains tax entirely for heirs. Works especially well combined with 1031s during life — defer through the working years, eliminate at estate transfer.
Partial transfers. Selling a 50% interest only triggers tax on 50% of the gain. Rarely used in institutional LA multifamily but occasionally useful for specific ownership structures.
Installment sales. Spreading the sale proceeds over multiple tax years can reduce the federal bracket impact if the gain would otherwise push you into higher brackets in a single year. Limited applicability but occasionally useful.
Opportunity zone investments. Rolling gains into qualified opportunity zone funds defers (and partially reduces) capital gains tax. Not typically used for LA multifamily-to-multifamily exchanges but an option for larger portfolio-level transactions.
Avoid the tax entirely through the sale itself. Without a 1031, stepped-up basis, or specific structural reasons, the tax is owed. "Tax-free" sale strategies that sound too good to be true almost always are.
Retroactively qualify for 1031 after closing. The 1031 has to be structured before the sale closes. Proceeds must go to a qualified intermediary; the seller cannot touch them. After close, the exchange cannot be set up.
Eliminate California state tax by moving. California has aggressive rules on LA property gains being California-sourced regardless of seller's state residence at sale. Moving out of California before sale rarely eliminates CA tax on the gain.
Taxes are the biggest line item on most LA multifamily sales without a 1031. Getting the tax strategy right before you list often makes a larger difference to your net proceeds than any negotiation you'll have with a buyer. Consult a CPA or tax attorney familiar with LA multifamily transactions well before you commit to a specific sale path.
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Related reading:
- The Complete 1031 Exchange Guide for LA Multifamily Investors
- Try the 1031 Exchange Calculator
- Selling vs. Refinancing Your LA Apartment Building
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap. $1.41 billion across 254 closed transactions. Tax strategy is where many of those sales got made — or lost — in the pre-listing phase.
Note: this is not tax advice. Consult a CPA or tax attorney for advice on your specific situation.
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