Capital gains tax in California (2026): selling a business, real estate or farm

California taxes a lifetime gain like a paycheck

The Franchise Tax Board says it plainly: California does not have a lower rate for capital gains, and all capital gains are taxed as ordinary income (FTB capital gains page, updated January 28, 2026). A business you built for 30 years and a bonus check land in the same brackets. The top bracket is 12.3% on joint taxable income above $1,485,906 (2025 FTB rate schedule; the indexed 2026 figures had not been published as of October 2026).

On top of that sits the 1% Behavioral Health Services Tax (formerly the Mental Health Services Tax) on taxable income over $1,000,000 (FTB 2026 Form 540-ES instructions). That $1,000,000 line is not doubled for married couples, and a single sale year crosses it easily. Federal tax still applies at 0%, 15% or 20% on the long-term gain for 2026 (Rev. Proc. 2025-32); the federal capital gains guide covers that layer.

Worked example: one $2,000,000 sale, three outcomes

A joint-filing couple sells their company for a $2,000,000 gain: $1,700,000 of long-term gain and $300,000 of equipment recapture. As California residents paid in cash in 2026, the sale adds $232,339 of California tax and $747,914 of total tax, an effective 37.4%.

• Moved to Nevada first: the same stock sale closed after a genuine change of domicile costs $515,575. The California piece, $232,339, is the entire difference.
• Stayed, but took a 5-year note: spreading the capital gain across 2026 to 2030 brings total tax to $594,329, with California at $186,856. Most years now stay under the $1,000,000 surcharge line (FTB 2026) and below the federal 20% bracket.

The engine does not model note interest or the buyer-credit side of seller financing. The installment sale analysis and the moving-before-the-sale analysis walk through both.

Your California gain is often bigger, or smaller, than your federal gain

California keeps its own basis records, and several federal benefits never made it into state law. Each one changes the number on Schedule D (540):

• Bonus depreciation. California does not follow IRC 168(k), and its Section 179 deduction is capped at $25,000, reduced once qualifying purchases pass $200,000 (FTB 3885A instructions, 2025). An equipment-heavy seller who expensed machines federally has a higher California basis, so the California recapture on the same sale is smaller. Keep the separate state depreciation schedule; you will need it at closing.
• Qualified small business stock. California does not conform to the Section 1202 exclusion or the Section 1045 rollover, so the entire gain goes on the state return (2025 Schedule D (540) instructions). A founder who excludes $10 million federally still owes California on all of it; see the QSBS analysis.
• Opportunity Zones. Reinvesting gain in a qualified fund defers federal tax only. California does not conform to Sections 1400Z-1 and 1400Z-2 (same 2025 instructions), so the state tax is due in the sale year; the Opportunity Zone analysis models the split.

Moving out before the sale: what FTB keeps

FTB Publication 1100 sorts installment and sale income by what was sold. California real property is California-source wherever you live, so a Nevada retiree selling an Orange County rental still files a nonresident return. Intangibles such as stock or an LLC interest are generally sourced to your state of residence when you sell. That is why the Nevada example above works only if the move is real and finished before the sale.

The catch for installment sellers: if you sell stock while a California resident and move afterward, every later installment of that gain is still taxable by California (Pub. 1100, Example 8). Only the interest on the note follows you to your new state. Timing the move before the signing, not after, is what changes the answer.

Form 593: California withholds at the closing table

Escrow withholds on most California real estate sales over $100,000, residents included, at 3 1/3% of the total price or, if the seller elects, 12.3% of the estimated gain for an individual (2026 Form 593 instructions). A principal residence, a loss or zero gain, and a completed like-kind exchange are among the exemptions certified on the form.

On a seller-financed sale the buyer withholds 3 1/3% of the down payment in escrow, then on the principal of every later payment unless FTB approves an elect-out after you report the whole gain; FTB answers within 30 days (2026 instructions). The California installment sale page covers the paperwork and the state version of the large-note interest charge.

Transfer taxes: the Los Angeles cliff

Counties charge $1.10 per $1,000 of value (R&TC 11911), and cities can add their own. The City of Los Angeles charges 0.45%, and Measure ULA lifts the total to 4.45% of the entire price above $5,400,000 and 5.95% at $10,900,000 or more, for closings after June 30, 2026 (LA Office of Finance). Because the higher rate applies to the whole price, a $5,410,000 sale pays about $216,000 more transfer tax than a $5,399,000 sale. The purchase contract decides who pays; sellers usually do, so price negotiations near the line matter more than the income tax math.

S corporations and partnerships: the PTE elective tax

When the seller is an S corporation or partnership, California lets the entity elect to pay a 9.3% tax on qualified net income, extended for taxable years 2026 through 2030 (FTB PTE elective tax page). The entity deducts it federally, which matters in a sale year when the federal SALT deduction is capped, and the owners take a California credit. The election requires a payment by June 15 of the sale year, so a sale planned for the fall needs the decision in spring. More on entity-level tax in pass-through entity tax on a sale.

1031 exchanges out of state, and the estate side

California honors a 1031 exchange, but if the replacement property is in another state you file FTB 3840 every year until the California-source deferred gain is finally recognized (R&TC 18032, 2025 FTB 3840 instructions). Sell the Texas replacement in 2035 and California still collects.

California has no estate or inheritance tax, and inherited property generally takes a California basis equal to fair market value at death (2025 Schedule D (540) instructions), which makes holding for the step-up a real option for older owners. Compare neighbors on the capital gains tax by state table, such as Nevada. To see every path side by side for your own sale, get the Big Sale Tax Analysis.

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