I live in California and sold a condo in Washington State that was used exclusively as a rental unit. What are the capital gains tax consequences?

[DS30 · Accepted solution]

It depends but you will need to report the sale on your federal and CA resident state income tax return whether or not you have a capital gain or loss on this rental property. Since WA has no individual state income taxes, you will not have any income tax filing requirements in WA.

You will need to include this on your CA resident state income tax return because, as a resident of CA, you are taxed on all income from all sources (including any gain (or loss) for the sale of a capital asset located in another state).

One additional note -

When you sell a property that was used as a rental, you must pay 25 percent recapture tax (also referred to as Section 1250 recapture) as well as regular state income tax on the depreciation you claimed. (Remember the IRS will assume that you claimed the correct amount of depreciation every year—this is true regardless of whether you actually claimed any depreciation on your tax return). The gain on the recapture will be taxable on both your federal and resident state income tax returns. (Unfortunately, California taxes both capital gains and recapture as regular income.)