What is the capital gains tax rate on a rental property?

For property held more than a year, federal long-term capital gains rates are 0%, 15%, or 20% depending on taxable income. Depreciation recapture is taxed separately at up to 25%. High earners owe an additional 3.8% NIIT, and most states also tax the gain. The combined federal-plus-state bill can range from roughly 15% to 40% of the gain.

How is the gain on a rental property calculated?

Take the gross sale price, subtract selling costs (commissions, closing fees), and subtract the adjusted cost basis (original price plus capital improvements minus cumulative depreciation taken). The result is the taxable gain, which is then split between depreciation recapture and the remaining capital gain.

How do I calculate capital gains tax on sale of rental property?

Estimate net sale price after selling costs, subtract adjusted basis, then split the gain between depreciation recapture and remaining capital gain. Apply the federal long-term capital gains rate, up to 25% federal recapture rate, 3.8% NIIT if applicable, and state tax. A 1031 exchange may defer the federal tax if the sale proceeds are reinvested into like-kind real estate.

Can I avoid capital gains tax on a rental property?

You can often defer it with a properly structured 1031 exchange or installment sale, and you may reduce it by harvesting capital losses elsewhere. Under current law, holding property until death can create a step-up in basis for heirs. These strategies have strict rules, so confirm with a CPA before selling.

What is the difference between capital gains and depreciation recapture?

Capital gains tax applies to the appreciation portion of the gain — the difference between original cost and sale price. Depreciation recapture applies to the depreciation deductions previously taken, taxed at up to 25% federal. Both can apply on the same sale, with recapture often hitting first.

How much do I owe in state capital gains tax?

State rates vary widely. Texas, Florida, Tennessee, and other no-income-tax states owe 0%. California taxes capital gains as ordinary income up to 13.3%. Most states fall between 4% and 9%. Always model state tax in addition to federal when estimating a sale.

What if I sell at a loss?

A loss on investment real estate may be deductible, but the treatment depends on facts such as prior depreciation, Section 1231 history, passive-loss rules, and whether any part of the property had personal use. Ask a tax professional before assuming how the loss will offset other income or gains.

← Real estate investing guides

Selling a rental

Capital Gains Tax on Rental Property: Calculate What You Owe at Sale

Calculate capital gains tax on rental property and understand how depreciation recapture, NIIT, state tax, and 1031 exchanges affect a sale.

Jerry Chu

Co-founder & CEO, Lofty

Updated May 15, 20268 min read

Estimate the tax you would owe See how 1031 exchanges defer tax

How capital gains on a rental are calculated

The taxable gain on a rental sale is the net sale price minus the adjusted cost basis. Net sale price is the gross sale price minus selling costs (broker commissions, closing fees, transfer tax). Adjusted cost basis is the original purchase price plus capital improvements minus the cumulative depreciation taken (or "allowed or allowable") during ownership.

Selling costs typically run 6% to 8% of the sale price and reduce the taxable gain.
Capital improvements (a new roof, kitchen remodel, addition) increase basis and reduce gain. Repairs do not.
Depreciation reduces basis even if you never claimed the deduction, which is why most owners are better off claiming it each year.

Rental property capital gains calculator formula

A rental property capital gains calculator usually starts with sale price, subtracts selling costs, then subtracts adjusted basis. The result is split between depreciation recapture and remaining long-term capital gain, with NIIT and state tax added when they apply. The 1031 exchange calculator can model the same sale as an outright sale versus a tax-deferred exchange.

Long-term vs short-term capital gains (2026 brackets)

Property held more than a year qualifies for long-term capital gains rates of 0%, 15%, or 20%, depending on taxable income. Property held a year or less is short-term and taxed at ordinary income rates, which reach 37% in 2026.

0% LTCG rate: taxable income up to roughly $48,350 single / $96,700 MFJ.
15% LTCG rate: taxable income up to roughly $533,400 single / $600,050 MFJ.
20% LTCG rate: taxable income above those thresholds.
Capital gains stack on top of ordinary income, so wages and rental income fill the lower brackets first and can push gains into a higher LTCG bracket.

Depreciation recapture: the surprise on your return

A separate, often-misunderstood tax applies to the portion of gain attributable to depreciation. Unrecaptured Section 1250 gain is taxed at up to 25% federal — higher than long-term capital gains rates. On a property held 10+ years, depreciation recapture can be the single largest line on the tax return, even when the underlying gain looks modest. Components reclassified by a cost segregation study as Section 1245 personal property are recaptured at ordinary rates instead of the 25% cap.

NIIT and state tax stack on top

Higher-income investors owe an additional 3.8% Net Investment Income Tax (NIIT) on rental gains when modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. The NIIT thresholds are not inflation-indexed, so more taxpayers cross them every year. State capital gains tax then stacks on top of all federal tax. California residents, for example, can pay 13.3% state on top of federal — pushing the total tax bill on a long-held rental sale toward 35% or more before factoring in any 1031 deferral.

How the sale gets reported

Sales of investment real estate are generally reported on Form 4797 (Sales of Business Property), which separates the gain into Section 1250 unrecaptured gain (the depreciation portion) and Section 1231 long-term capital gain. The amounts then flow to Schedule D and the capital gains tax worksheet, where the 25% cap on the recapture portion is applied alongside the LTCG rates.

Ways to defer or reduce the tax

Several strategies can defer or reduce the tax on a rental sale. Each has rules, deadlines, and tradeoffs, so the right choice depends on whether you want to stay invested in real estate, spread payments over time, or offset gains with losses elsewhere.

1031 exchange: defers the entire federal tax bill (gain plus recapture) by reinvesting in like-kind property within 180 days.
Installment sale: spreads the gain across multiple years, smoothing the tax impact and potentially keeping you in a lower bracket.
Tax-loss harvesting: realized losses on stocks or other investments can offset capital gains in the same year.
Step-up in basis at death: heirs receive the property at fair market value, eliminating the deferred gain entirely.

Strategies for the tax bill at sale

Pay the tax
Best for
Investors who want flexibility and are exiting real estate.
Tradeoff
Federal gain + recapture + NIIT + state can take 25% to 40% of profit.
1031 exchange
Best for
Investors continuing in real estate within 180 days.
Tradeoff
Strict deadlines and limited control under the 45-day clock.
Installment sale
Best for
Sellers who can wait for proceeds and want to spread tax.
Tradeoff
Buyer credit risk and ongoing collection responsibility.
Tax-loss harvesting
Best for
Investors with losses elsewhere in the portfolio.
Tradeoff
Only helps if you actually have realized losses to offset gains.

Option	Best for	Tradeoff
Pay the tax	Investors who want flexibility and are exiting real estate.	Federal gain + recapture + NIIT + state can take 25% to 40% of profit.
1031 exchange	Investors continuing in real estate within 180 days.	Strict deadlines and limited control under the 45-day clock.
Installment sale	Sellers who can wait for proceeds and want to spread tax.	Buyer credit risk and ongoing collection responsibility.
Tax-loss harvesting	Investors with losses elsewhere in the portfolio.	Only helps if you actually have realized losses to offset gains.

Risks and surprises when selling a rental

Depreciation recapture is not capped at 15% or 20% — the rate is up to 25% on Section 1250 unrecaptured gain, and ordinary rates apply to any Section 1245 components from cost segregation. Many sellers under-budget for this and are surprised at tax time.
Selling in a high-income year can push gains into the 20% bracket and trigger the 3.8% NIIT. Income stacking matters because wages and rental income fill the lower brackets first.
Short-term capital gains (held one year or less) are taxed at ordinary income rates, which can be more than double the long-term rate.
A failed 1031 exchange can make the sale taxable months after the proceeds have already been tied up in a replacement search.
State treatment of 1031 exchanges varies, and some states require tracking of deferred gains even when federal tax is deferred.
Capital improvements that increase basis must be documented. Without records, the IRS uses the unimproved basis and the taxable gain is higher.

Real estate calculators

1031 Exchange Calculator Real Estate Investment Calculator

Checklist for fractional real estate retirement planning How fractional ownership lowers real estate costs

Frequently asked questions

What is the capital gains tax rate on a rental property?: For property held more than a year, federal long-term capital gains rates are 0%, 15%, or 20% depending on taxable income. Depreciation recapture is taxed separately at up to 25%. High earners owe an additional 3.8% NIIT, and most states also tax the gain. The combined federal-plus-state bill can range from roughly 15% to 40% of the gain.
How is the gain on a rental property calculated?: Take the gross sale price, subtract selling costs (commissions, closing fees), and subtract the adjusted cost basis (original price plus capital improvements minus cumulative depreciation taken). The result is the taxable gain, which is then split between depreciation recapture and the remaining capital gain.
How do I calculate capital gains tax on sale of rental property?: Estimate net sale price after selling costs, subtract adjusted basis, then split the gain between depreciation recapture and remaining capital gain. Apply the federal long-term capital gains rate, up to 25% federal recapture rate, 3.8% NIIT if applicable, and state tax. A 1031 exchange may defer the federal tax if the sale proceeds are reinvested into like-kind real estate.
Can I avoid capital gains tax on a rental property?: You can often defer it with a properly structured 1031 exchange or installment sale, and you may reduce it by harvesting capital losses elsewhere. Under current law, holding property until death can create a step-up in basis for heirs. These strategies have strict rules, so confirm with a CPA before selling.
What is the difference between capital gains and depreciation recapture?: Capital gains tax applies to the appreciation portion of the gain — the difference between original cost and sale price. Depreciation recapture applies to the depreciation deductions previously taken, taxed at up to 25% federal. Both can apply on the same sale, with recapture often hitting first.
Does selling a rental trigger NIIT?: Yes, for high-income investors. The 3.8% Net Investment Income Tax applies to capital gains on rental property when modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. NIIT stacks on top of capital gains tax and depreciation recapture.
How much do I owe in state capital gains tax?: State rates vary widely. Texas, Florida, Tennessee, and other no-income-tax states owe 0%. California taxes capital gains as ordinary income up to 13.3%. Most states fall between 4% and 9%. Always model state tax in addition to federal when estimating a sale.
What if I sell at a loss?: A loss on investment real estate may be deductible, but the treatment depends on facts such as prior depreciation, Section 1231 history, passive-loss rules, and whether any part of the property had personal use. Ask a tax professional before assuming how the loss will offset other income or gains.

Sources

Topic No. 409: Capital Gains and Losses
Internal Revenue Service
Publication 544: Sales and Other Dispositions of Assets
Internal Revenue Service
Topic No. 559: Net Investment Income Tax
Internal Revenue Service

About Jerry Chu

Jerry leads Lofty, a fractional real estate investing platform used by tens of thousands of investors. He writes about how everyday investors can access rental property income without the friction of becoming a landlord.

Related guides

Tax-deferred reinvestment

1031 exchange

Learn how a 1031 exchange lets rental property owners defer capital gains tax by reinvesting sale proceeds into a like-kind investment.

Rental tax basics

Rental depreciation

Understand how to calculate depreciation on rental property, how the 27.5-year schedule works, and what depreciation recapture means at sale.

Rental income

Understand how rental income investing works, what affects cash flow, and how to compare direct rentals, REITs, and fractional properties.

← Real estate investing guides

Selling a rental

Capital Gains Tax on Rental Property: Calculate What You Owe at Sale

Calculate capital gains tax on rental property and understand how depreciation recapture, NIIT, state tax, and 1031 exchanges affect a sale.

Jerry Chu

Co-founder & CEO, Lofty

Updated May 15, 20268 min read

Estimate the tax you would owe See how 1031 exchanges defer tax

How capital gains on a rental are calculated

Selling costs typically run 6% to 8% of the sale price and reduce the taxable gain.
Capital improvements (a new roof, kitchen remodel, addition) increase basis and reduce gain. Repairs do not.
Depreciation reduces basis even if you never claimed the deduction, which is why most owners are better off claiming it each year.

Rental property capital gains calculator formula

Long-term vs short-term capital gains (2026 brackets)

0% LTCG rate: taxable income up to roughly $48,350 single / $96,700 MFJ.
15% LTCG rate: taxable income up to roughly $533,400 single / $600,050 MFJ.
20% LTCG rate: taxable income above those thresholds.
Capital gains stack on top of ordinary income, so wages and rental income fill the lower brackets first and can push gains into a higher LTCG bracket.

Depreciation recapture: the surprise on your return

NIIT and state tax stack on top

How the sale gets reported

Ways to defer or reduce the tax

1031 exchange: defers the entire federal tax bill (gain plus recapture) by reinvesting in like-kind property within 180 days.
Installment sale: spreads the gain across multiple years, smoothing the tax impact and potentially keeping you in a lower bracket.
Tax-loss harvesting: realized losses on stocks or other investments can offset capital gains in the same year.
Step-up in basis at death: heirs receive the property at fair market value, eliminating the deferred gain entirely.

Strategies for the tax bill at sale

Pay the tax
Best for
Investors who want flexibility and are exiting real estate.
Tradeoff
Federal gain + recapture + NIIT + state can take 25% to 40% of profit.
1031 exchange
Best for
Investors continuing in real estate within 180 days.
Tradeoff
Strict deadlines and limited control under the 45-day clock.
Installment sale
Best for
Sellers who can wait for proceeds and want to spread tax.
Tradeoff
Buyer credit risk and ongoing collection responsibility.
Tax-loss harvesting
Best for
Investors with losses elsewhere in the portfolio.
Tradeoff
Only helps if you actually have realized losses to offset gains.

Option	Best for	Tradeoff
Pay the tax	Investors who want flexibility and are exiting real estate.	Federal gain + recapture + NIIT + state can take 25% to 40% of profit.
1031 exchange	Investors continuing in real estate within 180 days.	Strict deadlines and limited control under the 45-day clock.
Installment sale	Sellers who can wait for proceeds and want to spread tax.	Buyer credit risk and ongoing collection responsibility.
Tax-loss harvesting	Investors with losses elsewhere in the portfolio.	Only helps if you actually have realized losses to offset gains.

Risks and surprises when selling a rental

Depreciation recapture is not capped at 15% or 20% — the rate is up to 25% on Section 1250 unrecaptured gain, and ordinary rates apply to any Section 1245 components from cost segregation. Many sellers under-budget for this and are surprised at tax time.
Selling in a high-income year can push gains into the 20% bracket and trigger the 3.8% NIIT. Income stacking matters because wages and rental income fill the lower brackets first.
Short-term capital gains (held one year or less) are taxed at ordinary income rates, which can be more than double the long-term rate.
A failed 1031 exchange can make the sale taxable months after the proceeds have already been tied up in a replacement search.
State treatment of 1031 exchanges varies, and some states require tracking of deferred gains even when federal tax is deferred.
Capital improvements that increase basis must be documented. Without records, the IRS uses the unimproved basis and the taxable gain is higher.

Real estate calculators

1031 Exchange Calculator Real Estate Investment Calculator

Checklist for fractional real estate retirement planning How fractional ownership lowers real estate costs

Frequently asked questions

What is the capital gains tax rate on a rental property?: For property held more than a year, federal long-term capital gains rates are 0%, 15%, or 20% depending on taxable income. Depreciation recapture is taxed separately at up to 25%. High earners owe an additional 3.8% NIIT, and most states also tax the gain. The combined federal-plus-state bill can range from roughly 15% to 40% of the gain.
How is the gain on a rental property calculated?: Take the gross sale price, subtract selling costs (commissions, closing fees), and subtract the adjusted cost basis (original price plus capital improvements minus cumulative depreciation taken). The result is the taxable gain, which is then split between depreciation recapture and the remaining capital gain.
How do I calculate capital gains tax on sale of rental property?: Estimate net sale price after selling costs, subtract adjusted basis, then split the gain between depreciation recapture and remaining capital gain. Apply the federal long-term capital gains rate, up to 25% federal recapture rate, 3.8% NIIT if applicable, and state tax. A 1031 exchange may defer the federal tax if the sale proceeds are reinvested into like-kind real estate.
Can I avoid capital gains tax on a rental property?: You can often defer it with a properly structured 1031 exchange or installment sale, and you may reduce it by harvesting capital losses elsewhere. Under current law, holding property until death can create a step-up in basis for heirs. These strategies have strict rules, so confirm with a CPA before selling.
What is the difference between capital gains and depreciation recapture?: Capital gains tax applies to the appreciation portion of the gain — the difference between original cost and sale price. Depreciation recapture applies to the depreciation deductions previously taken, taxed at up to 25% federal. Both can apply on the same sale, with recapture often hitting first.
Does selling a rental trigger NIIT?: Yes, for high-income investors. The 3.8% Net Investment Income Tax applies to capital gains on rental property when modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. NIIT stacks on top of capital gains tax and depreciation recapture.
How much do I owe in state capital gains tax?: State rates vary widely. Texas, Florida, Tennessee, and other no-income-tax states owe 0%. California taxes capital gains as ordinary income up to 13.3%. Most states fall between 4% and 9%. Always model state tax in addition to federal when estimating a sale.
What if I sell at a loss?: A loss on investment real estate may be deductible, but the treatment depends on facts such as prior depreciation, Section 1231 history, passive-loss rules, and whether any part of the property had personal use. Ask a tax professional before assuming how the loss will offset other income or gains.

Sources

Topic No. 409: Capital Gains and Losses
Internal Revenue Service
Publication 544: Sales and Other Dispositions of Assets
Internal Revenue Service
Topic No. 559: Net Investment Income Tax
Internal Revenue Service

About Jerry Chu

Related guides

Tax-deferred reinvestment

1031 exchange

Learn how a 1031 exchange lets rental property owners defer capital gains tax by reinvesting sale proceeds into a like-kind investment.

Rental tax basics

Rental depreciation

Understand how to calculate depreciation on rental property, how the 27.5-year schedule works, and what depreciation recapture means at sale.

Rental income

Understand how rental income investing works, what affects cash flow, and how to compare direct rentals, REITs, and fractional properties.

Capital Gains Tax on Rental Property: Calculate What You Owe at Sale

How capital gains on a rental are calculated

Rental property capital gains calculator formula

Long-term vs short-term capital gains (2026 brackets)

Depreciation recapture: the surprise on your return

NIIT and state tax stack on top

How the sale gets reported

Ways to defer or reduce the tax

Strategies for the tax bill at sale

Risks and surprises when selling a rental

Real estate calculators

Related articles

Frequently asked questions

Sources

About Jerry Chu

Related guides

1031 exchange

Rental depreciation

Rental income

Capital Gains Tax on Rental Property: Calculate What You Owe at Sale

How capital gains on a rental are calculated

Rental property capital gains calculator formula

Long-term vs short-term capital gains (2026 brackets)

Depreciation recapture: the surprise on your return

NIIT and state tax stack on top

How the sale gets reported

Ways to defer or reduce the tax

Strategies for the tax bill at sale

Risks and surprises when selling a rental

Real estate calculators

Related articles

Frequently asked questions

Sources

About Jerry Chu

Related guides

1031 exchange

Rental depreciation

Rental income