The Triple Hit: How One LA Decision Can Trigger Recapture, ULA and Reassessment
Here is a situation we see regularly: an owner in their seventies, a multifamily building held for 30 years, and a simple question:
Should I sell now or leave it to the children?
In Los Angeles, that decision involves three separate taxes governed by three separate rulebooks:
- Depreciation recapture
- Measure ULA
- Proposition 19
Optimise for one, and you can easily create a problem under another. The only reliable way to decide is to model all three using your actual figures.
Layer One: Depreciation Recapture
Thirty years of depreciation usually means the property has a low adjusted tax basis.
A substantial portion of the gain may be treated as unrecaptured Section 1250 gain, which can be taxed federally at up to 25%. California also taxes capital gains as ordinary income.
On a long-held multifamily building, depreciation recapture and related tax can become a seven-figure liability.
Layer Two: ULA at the Closing Table
Sell a property within the City of Los Angeles above the applicable threshold—currently around $5.4 million—and Measure ULA may impose a tax of 4% or 5.5% on the entire sale price.
This applies in addition to other taxes and can be due regardless of how much profit you make.
For a detailed explanation, see our full Measure ULA guide.
Layer Three: What Your Heirs Inherit
Hold the property until death, and the income tax position can change dramatically.
Your heirs generally receive a stepped-up basis equal to the property’s fair market value at the date of death. This may eliminate the deferred gain and depreciation recapture that built up during your ownership.
That is one of the strongest arguments for continuing to hold the property.
However, Proposition 19 sits on the other side of the equation.
For a rental property, the transfer to heirs will generally trigger reassessment to current market value for property tax purposes.
In simple terms:
The income tax may disappear, but the property tax is reset.
The Decision Matrix
Sell Now
You may pay depreciation recapture, capital gains tax and Measure ULA.
In return, you gain liquidity, simplicity and the ability to distribute or reinvest the proceeds.
Exchange and Continue Exchanging
A 1031 exchange may defer the federal and state income tax on the gain.
However, Measure ULA may still apply each time you sell an eligible Los Angeles property.
If you continue exchanging and hold the final replacement property until death, the stepped-up basis may eliminate the deferred gain.
Hold Until Death
You may avoid income tax on the accumulated gain entirely through the stepped-up basis.
However, your heirs may inherit a substantially higher property tax bill under Proposition 19. In some cases, that increased annual cost can make the property difficult to retain and may ultimately force a sale.
There is no universally correct answer.
There is only the right answer for your building, your family and your financial position. That answer may also change if a November ballot measure alters Measure ULA.
Does the Step-Up at Death Really Erase 30 Years of Depreciation?
For income tax purposes, generally yes.
The heirs receive a market-value basis, and the accumulated depreciation recapture may never be paid.
The property tax outcome is different because of Proposition 19.
Can I Gift the Building Now and Avoid All of These Taxes?
Usually, gifting the property creates the worst of both worlds.
Your children will generally receive your existing tax basis rather than a stepped-up basis. The transfer may also trigger a property tax reassessment.
Do not gift real estate without first modelling the income tax, property tax and estate-planning consequences.
Does a 1031 Exchange Avoid Measure ULA?
No.
Measure ULA can apply to each qualifying Los Angeles sale, regardless of whether the transaction is part of a 1031 exchange.
When Should This Planning Begin?
Ideally, several years before you expect to sell, exchange, gift or transfer the property.
The week the building is listed for sale is late.
It is rarely too late to improve the outcome, but earlier planning usually creates more options and lower costs.
Facing the Sell-or-Hold Question?
Have us run your decision matrix.
Tell us what you own, and where you're headed.
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