The young couple, Chris and Lisa Mattson, played by Patrick Wilson and Kerry Washington respectively, are ecstatic when they finally find their dream home in the affluent Lakeview Terrace neighborhood of Los Angeles. Chris is a successful businessman and Lisa is a dedicated nurse, and they hope to start their family in this idyllic community. However, all their hopes are soon crushed when their next-door neighbor, Abel Turner, played by Samuel L. Jackson, starts harassing them.
Abel is a widowed LAPD officer who takes pride in being the sole black homeowner in the neighborhood. He is extremely conservative and traditional, and disapproves of Chris and Lisa's interracial relationship. He believes that a white man has no business being with a black woman, and that Lisa should be with a black man like himself. Abel's son, Marcus, played by Jaishon Fisher, is a troubled teenager who is also influenced by his father's racist views. Abel constantly berates and belittles Marcus, and takes out his frustrations on Chris and Lisa.
At first, Abel's harassment is subtle and insidious. He starts by imposing strict rules and regulations on the couple, such as forbidding them from parking their car on the street, or having any guests over after a certain time. Chris and Lisa try to be accommodating and respectful, but it soon becomes clear that Abel has a hidden agenda. He starts making derogatory comments about Chris's career and ethnicity, and Lisa's appearance and sexual history. He uses his position as a police officer to intimidate and coerce the couple, threatening to report them for minor infractions.
Chris and Lisa try to reason with Abel, but he remains stubborn and unyielding. They seek help from other neighbors, but find little support. Some of them are wary of Abel's power and influence, while others share his prejudices. Chris's colleague, who is also his friend and confidant, suggests that he buy a gun for protection. Lisa is appalled by the idea, but Chris decides to take matters into his own hands.
The situation escalates when Marcus, who has a crush on Lisa, tries to break into their house. Chris catches him in the act, and a physical altercation ensues. Abel sees this and assumes that Chris is attacking his son. He storms over to the Mattsons' house, and breaks in, armed with a shotgun. Chris and Lisa are terrified for their lives, and manage to subdue Abel after a struggle. The police arrive, and Abel is arrested for trespassing and assault.
The aftermath of the incident leaves the Mattsons traumatized and disillusioned. They realize that they never truly belonged in Lakeview Terrace, and that Abel's hostility was just a symptom of a deeper-seated racism and inequality. They decide to sell their house and move away, but not before confronting Abel one last time. They tell him that his hatefulness and bigotry only made them stronger, and that they will always be proud of who they are and who they love. Abel, who is now alone and bitter, watches them leave, and realizes that he has lost the battle for his soul.