Selling or Exchanging a Rental

Possibly not on all of it. Under IRC §121, you can exclude up to $250,000 of gain — or up to $500,000 if you're married filing jointly — on the sale of a main home, as long as you owned it and lived in it as your main home for at least two of the five years before the sale. A property you once lived in and later rented can still qualify if it meets that two-of-five-years test.

Two limits matter for a former rental. First, gain attributable to depreciation you took (or could have taken) while it was a rental is not excludable — that portion is "recaptured" and taxed. Second, you generally can't use the exclusion if you already used it on another home sale within the prior two years. Any gain beyond the exclusion, plus the recaptured depreciation, may be taxable.

This is general information, not tax advice. The numbers turn on your exact ownership, use, and depreciation history, so confirm with your CPA before assuming you owe — or don't owe — tax on a sale.

A 1031 exchange (named for IRC §1031) lets you defer capital gains tax by reinvesting the proceeds from selling investment or business real property into like-kind investment real property, instead of cashing out and paying tax now. Since the 2017 Tax Cuts and Jobs Act it applies to real property only. Most real estate is "like-kind" to other real estate — for example, a duplex for an apartment building — but U.S. property is not like-kind to property outside the United States.

Yes, you effectively need a qualified intermediary. To keep the exchange valid you cannot take actual or constructive receipt of the sale proceeds; a qualified intermediary holds them and uses them to acquire the replacement property. The timelines are strict and not extendable: you have 45 days from the sale to identify replacement property in writing, and 180 days to close. Choose the intermediary carefully, since a failed or insolvent intermediary can blow the deadlines and disqualify the exchange.

This is general information, not tax advice. Plan a 1031 exchange with a qualified intermediary and your CPA before you sell, because the deadlines start at closing and can't be fixed afterward.

The main tool is a 1031 exchange: instead of selling and paying capital gains tax now, you roll the proceeds into like-kind replacement investment property — which can be located in another state — and defer the gain under IRC §1031. To keep the exchange valid you cannot take receipt of the sale money, so a qualified intermediary holds it and acquires the replacement property for you, and you must identify the replacement within 45 days of the sale and close within 180 days. Those deadlines start at closing and cannot be extended.

If the goal is also to keep the equity out of probate for your heirs, many owners hold the property (or the replacement) in a revocable living trust. Assets titled in a properly funded living trust pass to your named beneficiaries without going through California probate court, which saves both time and expense. The trust is part of estate planning, separate from the tax deferral, but the two are often set up together when an owner is repositioning a long-held rental.

This is general information, not legal or tax advice. Plan a 1031 exchange with a qualified intermediary and your CPA before you sell, and set up any trust with an estate-planning attorney.

A lease is a contract tied to the property, not to you, so it transfers to the buyer at closing. A fixed-term lease stays fully in force — the new owner steps into your shoes and must honor the existing rent and terms until the term ends. Selling the building does not, by itself, end a tenant's right to stay.

A month-to-month tenancy is more flexible but still protected. To end one, the owner must give written notice under Civil Code §1946.1 — 60 days if any tenant has lived there a year or more, or 30 days if everyone has been there less than a year. For properties covered by the Tenant Protection Act, ending a tenancy of 12 months or more also requires a "just cause" under §1946.2, which a sale alone does not satisfy. If a buyer wants the unit delivered vacant, they generally have to negotiate a buyout with the tenant; that is the buyer's decision and cost, not something the sale forces.

This is general information, not legal advice. Notice periods, just-cause rules, and local ordinances vary, so confirm the requirements for the property's city or with counsel before serving notice or marketing the property as vacant.