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When you sell a rental, the tax is not only on the appreciation. The depreciation you claimed over the years is 'recaptured' and taxed first — at up to 25%. Then the remaining long-term gain is taxed at 0, 15, or 20%. A 3.8% net investment income tax can apply on top.
That second layer does not apply to a stock or a home, which is why the bill is rarely the flat percentage owners expect. A 1031 exchange can defer the whole thing if you reinvest on schedule.
Selling a rental triggers two taxes, not one: depreciation recapture on top of the capital gain. That second layer does not apply to a stock or a home, which is why the bill is rarely the flat percentage owners expect.
Years of depreciation that lowered your rental income are recaptured at sale, taxed before any appreciation and at a higher rate than the long-term gain. For higher earners, the 3.8% surtax is added on top, so the real bill usually runs well above the plain capital gains estimate. See IRS Topic 409 for the unrecaptured §1250 rules.
Every rental sale carries all three. The recapture layer surprises the most owners.
The depreciation you took (or were allowed to take) is recaptured as unrecaptured Section 1250 gain, taxed at a maximum of 25%. This applies EVEN IF you never actually claimed the deduction — you owe on what you were allowed to take.
Appreciation above your adjusted basis is taxed at 0, 15, or 20% for the 2026 tax year, depending on your total income. The gain stacks on your other income, so the same gain can fall partly in the 15% band and partly in 20%.
Higher earners add 3.8% on the investment gain — pushes the top combined federal rate to about 28.8% on the LTCG portion. Applies to single filers above $200k MAGI, joint above $250k.
Your taxable gain is sale price − adjusted basis. Capital improvements (roof, HVAC, addition, buildout) raise basis and shrink the gain — but only if they were tracked. Basis rebuilding often lowers the bill more than any single other move.
Original purchase price + closing costs + every capital improvement you can document, minus accumulated depreciation. Rebuilding basis before filing often lowers the taxable gain more than anything else.
Recapture at 25% on the depreciation portion. LTCG at 0/15/20% on the appreciation portion. NIIT at 3.8% on the investment income portion if AGI thresholds are crossed. Numbers on a page, not a range.
A 1031 exchange defers recapture AND gain into the next property. Has to be arranged BEFORE closing, and runs on a fixed clock afterwards (45 days to identify, 180 days to close). See 1031 exchange if it's still an option. See capital gains tax planning for the full framework.
Why Rental Owners Trust Dimov Tax
About a quarter of rental sale returns we see missed basis or double-counted recapture. Both make the tax larger than it needs to be. Rebuilding basis and running the three layers separately usually shrinks the bill materially.
Your fee depends on the work involved, not hours billed. Three things move it: how many years the property was rented; how many properties are involved; whether more than one state taxes the gain.
To get a quote, tell us the purchase and sale details and how many years the property was rented. The fee comes back in writing before any work begins.
Four levers that actually move the number on a rental sale — in order of impact:
Sources: IRS Topic 409 (§1250 recapture, LTCG rates); Topic 559 (NIIT thresholds); Form 8824 instructions (§1031 deferral)
A good fit if:
Selling your main home? See capital gains tax on real estate sale for the $250k/$500k exclusion. Vacation/second home? capital gains tax on second home. Inherited it? capital gains tax on inherited property. Prior cost seg? cost segregation study cost.
Send the purchase and sale details, how many years the property was rented, and any improvement records you have. You get the full bill with recapture included — not just the gain — and a clear answer on whether a 1031 or basis correction still changes it before you file.
"About a quarter of the clients' returns that I look at are not fully utilizing the deductions that they have available. I think that number is even more."
— George Dimov, CPA, Founder of Dimov Tax
The real bill, not a range. Numbers approximate; consult a CPA before making decisions based on them.
