How much tax will I pay when I sell farmland in California?

For a high-income California seller, the combined top rate on long-term gain is roughly 37.1%: up to 20% federal long-term capital gains, plus the 3.8% net investment income tax, plus California tax of up to 13.3% (California taxes gains as ordinary income, with a 1% mental health surcharge above $1 million). Depreciation previously taken is recaptured at up to 25% federally as unrecaptured section 1250 gain, and some farm assets can be recaptured at ordinary rates. The actual figure depends on basis, income, and the character of the assets; a CPA's calculation controls.

Is California's 3.33% withholding an extra tax on a farmland sale?

No. Escrow generally withholds 3 1/3% of the gross sale price on Form 593 as a prepayment of California income tax, credited against the actual liability on the seller's return. Elections made before close can base withholding on the estimated gain instead of the gross price, which can free up significant cash at escrow.

Does a 1031 exchange eliminate the tax on a farmland sale?

It defers the tax rather than eliminating it. The gain carries into the replacement property through a reduced basis, and California tracks deferred gain on out-of-state replacements through an annual FTB Form 3840 filing. Deferral can continue through further exchanges, and under current law a step-up in basis at death can ultimately eliminate the deferred gain, which is why exchange strategy and estate strategy belong in the same conversation.

What happens to the tax if I never sell and the land passes at death?

Under current law, farmland passing at death generally receives a stepped-up basis to fair market value under IRC section 1014, which can effectively erase decades of built-in gain for income tax purposes. That is one of the three columns every family should see before signing a listing agreement: sell outright, exchange, or hold. Each has real costs and real risks, and the right answer depends on the family, not just the math.

Farmland Sale Tax Estimator

The Short Version

For a high-income California seller, long-term gain on farmland can face a combined rate of roughly 37%: up to 20% federal capital gains, 3.8% net investment income tax, and up to 13.3% California tax, with depreciation recaptured at up to 25% federally on top. Escrow also holds back 3 1/3% of the gross price for the state. The estimator below runs those rules on your numbers, then shows the same land two other ways: exchanged under section 1031, or held until it passes with a stepped-up basis. The spread between the columns is usually the most important number a family sees all year.

Our $28M case study walks one hypothetical family through this math in detail. This page lets you run it on your own ground. Three inputs come off documents you already have: the price you expect, what you have into the property, and the depreciation your returns have claimed over the years. Everything else is arithmetic and statute.

Estimate your net from an outright sale

Top-bracket assumptions on purpose: sales at this scale usually land there, and it is better to be surprised in your favor. Your CPA's calculation controls.

Expected sale price

Adjusted cost basis

What you paid plus improvements, minus depreciation. Long-held family ground is often shockingly low.

Depreciation taken

Trees, vines, irrigation, structures. From your depreciation schedules.

Selling costs

Commissions, escrow, title. Optional.

Total gain

Federal capital gains (20% on gain above recapture)

Depreciation recapture (up to 25% federal)

Net investment income tax (3.8%)

California tax (up to 13.3%, gains taxed as ordinary income)

Estimated total tax

Effective rate on the gain

Estimated net after tax and costs

Held at escrow for the FTB (3 1/3% of gross price, credited on your return)

Sell outright

estimated tax paid now. Clean break, full liquidity, and the largest tax bill of the three paths.

1031 exchange

of tax deferred, not eliminated: the gain carries into the replacement property, and California tracks it on Form 3840. Strict deadlines apply; see the 1031 guide.

Hold until it passes

of built-in tax that a stepped-up basis at death can effectively erase under current law. Holding has its own costs and risks; see the basis rules and Keeping the Farm.

The spread between these columns is why the planning happens before escrow opens, not after. None of the three is right for every family; each trades taxes against liquidity, risk, and what the family actually wants the land to do.

Educational estimate, current as of September 2026, using top-bracket simplifications: 20% federal long-term capital gains, 3.8% net investment income tax, 25% on depreciation recapture (unrecaptured section 1250 gain), and 13.3% California (12.3% top bracket plus the 1% mental health surcharge above $1 million; California taxes gains as ordinary income). Some farm assets (equipment, certain plantings) can be recaptured at ordinary federal rates instead; basis, income level, filing status, installment terms, and asset character all change the result. The 3 1/3% escrow withholding (Form 593) is a prepayment, not an additional tax, and can be reduced by election before close. This is not tax advice; your CPA's calculation controls. No strategy eliminates risk, and tax law can change.

How to read your results

Three things consistently surprise families at this table. First, the recapture: decades of depreciation on trees, vines, and irrigation come back at up to 25% federally in the year of sale, and it is often the piece nobody budgeted for. Second, California's share: the state taxes the entire gain as ordinary income, which for a large sale means the top of the bracket ladder, and there is no lower "capital gains rate" in Sacramento. Third, the escrow withholding: 3 1/3% of the gross price comes off the wire at closing unless an election is made beforehand, and on a $6 million sale that is $200,000 of cash flow decided by a form most sellers have never heard of. We cover that election in the withholding guide.

And the columns matter more than the first number. An outright sale answers "how much tax"; the exchange column answers "what if the money stayed invested"; the hold column answers "what if the land outlives the tax." The right answer is family-specific, which is precisely why we model all three, with your CPA's numbers, before anyone signs a listing agreement. Months before escrow is the ideal time; see The Cost of Waiting for what deferral of the decision itself costs.

Legacy Land Advisory

Want these numbers run properly, with your CPA in the room?

The estimator is arithmetic. The decision is not. We build the full three-column picture for your ground, coordinate it with your CPA and attorney, and get paid a flat fee either way, so the advice does not depend on which column you choose.

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Important Disclosures

This page is an educational tool, not tax, legal, or investment advice, and its results are hypothetical illustrations. It applies top-bracket simplifications (20% federal long-term capital gains, 3.8% net investment income tax, up to 25% on unrecaptured section 1250 gain, and California's top rates of 12.3% plus the 1% mental health services surcharge above $1 million; California taxes capital gains as ordinary income) and does not model income phase-ins, alternative minimum tax, installment sales, partial-year issues, entity structures, or the ordinary-income recapture that can apply to certain farm assets. The 3 1/3% real estate withholding under Form 593 is a prepayment of California tax, adjustable by election before close. Figures current as of September 2026 and subject to change in law. Consult a qualified CPA and attorney; their calculations control.

Regulatory Disclosure: Avidity Capital Inc. is a California state-registered investment adviser (CRD# 312745). Registration does not imply a certain level of skill or training. For firm background information, visit adviserinfo.sec.gov/firm/summary/312745.

No Commission Disclosure: Avidity Capital Inc. is compensated solely by advisory fees paid directly by clients. The firm does not receive commissions, referral fees, or revenue-sharing payments from sponsors, issuers, or product providers.

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