How capital gains tax works when you sell a rental
Selling a rental property at a profit triggers two taxes, not one. First, the depreciation you deducted over the years is "recaptured" — the portion of your gain equal to that depreciation is taxed as unrecaptured Section 1250 gain at a maximum rate of 25%. Second, any remaining profit is a long-term capital gain, taxed at 0%, 15%, or 20% depending on your income. High earners may also owe the 3.8% Net Investment Income Tax, and most states tax the gain as well.
The math runs in these steps:
- Net sale price = sale price − selling costs.
- Adjusted basis = purchase price − total depreciation claimed.
- Total gain = net sale price − adjusted basis.
- Split it: the amount up to your depreciation is recaptured at 25%; the rest is a capital gain at your rate. Add state tax and (if applicable) the 3.8% NIIT.
Worked example
You bought a rental for $300,000, claimed $50,000 in depreciation, and sell for $400,000 with $24,000 in selling costs, a 15% capital gains rate, and no state tax or NIIT. Net sale price is $376,000; adjusted basis is $250,000; total gain is $126,000. The first $50,000 is recaptured at 25% = $12,500; the remaining $76,000 is taxed at 15% = $11,400. Total tax ≈ $23,900, leaving after-tax proceeds of about $352,100 before any mortgage payoff.
How to reduce or defer it
The most common move is a 1031 exchange, which defers both the recapture and the capital gains tax if you reinvest into another investment property. You can also time the sale into a lower-income year, offset with losses, or — for heirs — rely on a step-up in basis. See how to avoid depreciation recapture for the full list, and the depreciation recapture calculator to isolate that piece.
Frequently asked questions
How is capital gains tax calculated on a rental sale?
Sale price minus selling costs minus adjusted basis (purchase price − depreciation) = gain. The depreciation portion is taxed up to 25%; the rest at your 0/15/20% capital gains rate, plus state tax and possibly the 3.8% NIIT.
Do I pay both recapture and capital gains?
Yes — selling a rental at a gain triggers both. This calculator separates and totals them.
How do I avoid capital gains on a rental?
A 1031 exchange defers both taxes if you reinvest into another investment property within the IRS deadlines.
Related calculators
- Depreciation Recapture Calculator — isolate the recapture piece.
- 1031 Exchange Calculator — defer the whole tax.
- Rental Property Depreciation Calculator — the deductions that get recaptured.
- Cash-on-Cash Return Calculator — measure your annual return.