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Capital Gains Tax on Investment Property

A specialized matter handled by a CPA firm.

Direct representation, not advice from the sidelines.

TL;DR

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.
That unrecaptured depreciation is taxed at a rate up to 25 percent, while the remaining long-term gain is taxed at 0, 15, or 20 percent, and a 3.8 percent net investment income tax can apply on top.
A 1031 exchange can defer the whole thing if you reinvest in other real estate on schedule. If you are not exchanging, the bill is larger than most owners expect.

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 percent surtax is added on top, so the real bill usually runs well above the plain capital gains estimate.

The three layers of capital gains tax on investment property

Depreciation recapture

The depreciation you took (or were allowed to take) is recaptured as unrecaptured Section 1250 gain, taxed at a maximum of 25 percent.

Long-term capital gain

Appreciation above your adjusted basis is taxed at 0, 15, or 20 percent for the 2026 tax year, depending on your total income.

Net investment income tax

Higher earners add 3.8 percent on the investment gain, which can push the top combined rate well past the headline 20 percent.

What counts toward adjusted basis on a rental

Your taxable gain is the sale price minus your adjusted basis, and undercounted basis inflates the gain. Capital improvements, the roof, the HVAC, the addition, raise basis and shrink the gain, but only if they were tracked.

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

...a fairly complicated situation with property sale and moving between states... quick, answered all questions.

Vladimir, Google review

How to lower or defer the tax on a rental sale

Reinvest through a1031 exchange and defer recapture and gain into the next property. It has to be arranged before you close, and it runs on a fixed clock afterwards. See deferring capital gains tax.
Rebuild basis from improvement records before filing, so you are not taxed on dollars you already spent.
Time the sale around your income year so more of the gain falls in a lower rate band.

Pricing for a rental sale review

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.

Capital Gains Tax on Investment Property

You get the full bill with recapture included, not just the gain, and a clear answer on whether a 1031 or a basis correction still changes it before you file.