I have found that there is still confusion when it comes to selling your home and taxes. Before 1997, when you sold your home you would transfer that gain into your new home to defer taxes. When you sell your home now you don’t pay taxes on $250k of the gain for single taxpayers and $500k for married. When they passed this exemption rule they did away with the once in a lifetime exemption and the depreciation for a personal residence.
The main rule for this is that you have to live in your residence for 2 of the previous 5 years. For a gain over the $250k/$500k exemption you will pay the long term capital gains rate for taxes. These taxes vary but on the federal level they are around 15% for most depending on your income. The California tax rate (among the highest in the country) is up to 13.3% for a married couple but about 10% for most in our area. So most people will be taxed at about 25% for the gain over the standard exemption.
If you are selling income property then you can transfer this gain to another income property or properties through the 1031 or Starker exchange. The general rule is that the total purchase price and loan has to be at or above what you sold for. For example .. if you sold your rental for $1.5m and had $500k in loans then you must purchase at or above $1.5m and carry a total loan at or above $500k. Once you close escrow on the home you are selling you have 45 days to identify the replacement properties and 180 days to close escrow.
One of the things you can do is sell your expensive $1.5m rental and buy multiple properties in another state (for example). There are many areas outside of the Bay Area where the housing properties are much cheaper (almost anywhere!) and rental rates are still very good. This would enable you to get much more income from your same investment!
For all tax questions specific to your situation please consult your tax professional!