Real Estate Tax Calc
Short-term versus long-term holding periods
The length of time you hold a property before selling determines whether your gain is short-term or long-term—and that distinction can dramatically affect your tax bill.
Short-term gain (held one year or less): Taxed as ordinary income at your marginal federal rate, which can be as high as 37%. For high-income investors, short-term gains can also be subject to the 3.8% net investment income tax (NIIT), resulting in a combined federal rate of up to 40.8%—before state tax.
Long-term gain (held more than one year): Taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income. The income thresholds that determine your rate adjust annually for inflation—consult the current-year IRS tax tables for exact figures. Long-term gains are also subject to the 3.8% NIIT if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
The holding period starts the day after you acquire the property and ends on the date of the sale. Selling on Day 366 (one year and one day) qualifies for long-term treatment; selling on Day 365 (exactly one year) does not.
How to calculate your adjusted basis
Your capital gain equals your amount realized (selling price minus selling costs) minus your adjusted basis. The adjusted basis is not simply your original purchase price—it is modified by capital improvements you made and depreciation deductions you claimed:
Adjusted basis = original purchase price + capital improvements − accumulated depreciation
Capital improvements add to basis: a new roof, an HVAC system, a room addition, or a kitchen remodel all increase your adjusted basis and reduce your eventual gain. Regular repairs and maintenance do not add to basis.
Accumulated depreciation reduces basis: every year you depreciate a rental property, the IRS treats your investment as being "recovered" through the deduction. When you sell, the basis that was previously reduced by depreciation is now lower, which means a larger gain—and the depreciation-related portion of that gain is taxed at the higher 25% rate.
The four tax tiers on a rental property sale
When you sell an investment property, your total gain is allocated across up to four federal tax tiers:
Tier 1 — True §1250 recapture (ordinary income): Applies only if you used accelerated depreciation above the straight-line amount. Rare for properties placed in service after 1986 (MACRS uses straight-line for real property). If applicable, this tier is taxed at your ordinary income rate.
Tier 2 — Unrecaptured §1250 gain (maximum 25%): The total straight-line depreciation you claimed on the building. This portion of the gain is taxed at a maximum federal rate of 25%. Your actual rate is the lesser of 25% and your ordinary income rate.
Tier 3 — §1231 gain (0%, 15%, or 20%): The appreciation above your original purchase price (the gain that exceeds your total depreciation taken). This is the portion eligible for the most favorable long-term capital gains rates.
Tier 4 — Net Investment Income Tax (3.8%): If your modified adjusted gross income exceeds the threshold ($200,000 single, $250,000 MFJ—these thresholds are not inflation-indexed), the 3.8% NIIT applies to your net investment income, which includes capital gains from real property sales.
Selling costs that reduce your gain
Several selling costs reduce your "amount realized" from the sale, which directly reduces your taxable gain. Common deductible selling costs include:
Real estate agent or broker commissions (typically 5%–6% of the sale price), title insurance paid by the seller, escrow fees allocated to the seller, transfer taxes or documentary stamp taxes, attorney fees related to the sale, and recording fees. Prorated property taxes assigned to the buyer at closing are not selling costs but a separate item.
Costs you cannot deduct as selling costs include: mortgage payoff amounts (paying off your loan is not a cost—it's a use of proceeds), costs you deducted elsewhere (such as repairs expensed in prior years), and amounts already included in your adjusted basis.
Worked example: 8-year rental sold for $500,000
An investor purchased a single-family rental in 2018 for $300,000 (land: $60,000; building: $240,000). Over 8 years, MACRS depreciation on the building totals $69,818 ($240,000 ÷ 27.5 × 8 years). The investor sells in 2026 for $500,000, paying $30,000 in commissions and selling costs.
Amount realized: $500,000 − $30,000 selling costs = $470,000.
Adjusted basis: $300,000 original cost − $69,818 accumulated depreciation = $230,182.
Total gain: $470,000 − $230,182 = $239,818.
Tier allocation:
Tier 2 — Unrecaptured §1250 gain: $69,818 (all depreciation taken, at maximum 25%)
Tier 3 — §1231 gain: $239,818 − $69,818 = $170,000 (appreciation, at LT rates)
Approximate federal tax (investor in the 20% LTCG bracket with full NIIT):
Tier 2: $69,818 × 25% = $17,455
Tier 3: $170,000 × 20% = $34,000
NIIT: $239,818 × 3.8% = $9,113
Approximate total federal capital gains tax: ~$60,568
State taxes would be additional. Using the Capital Gains Tax Calculator with your specific income and state can give a more precise estimate.
How to report capital gains on property
The sale of investment real property is not reported directly on Schedule D—it flows through Form 4797 (Sales of Business Property) first. Form 4797 calculates the §1231 gain (and any §1250 recapture), then passes the net §1231 gain to Schedule D. The unrecaptured §1250 gain is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions, which applies the 25% maximum rate.
The title company or closing agent files Form 1099-S reporting the gross proceeds to the IRS. Your return must reconcile this 1099-S. If the gain is taxable, it flows through Form 4797 and Schedule D. If it is fully deferred through a 1031 exchange, it is explained on Form 8824.
Frequently asked questions
What is the capital gains tax rate on investment property?
Long-term capital gains on investment property are taxed at 0%, 15%, or 20% federally, depending on your taxable income (thresholds adjust annually—check IRS tables). Depreciation previously taken creates unrecaptured Section 1250 gain taxed at a maximum 25%. Short-term gains are taxed as ordinary income at your marginal rate, up to 37%.
How does depreciation affect capital gains on a rental property?
Depreciation reduces your adjusted basis, which increases your total gain at sale. The portion of gain equal to prior depreciation taken is taxed as unrecaptured Section 1250 gain at a maximum 25% federal rate—not the more favorable 0%/15%/20% long-term rates. This is why rental property owners often face higher effective capital gains tax rates than stock investors.
Do selling costs reduce capital gains on property?
Yes. Real estate commissions, title insurance, legal fees, transfer taxes, and other selling costs reduce your amount realized, directly reducing your taxable gain. If you sell for $500,000 and pay $30,000 in selling costs, your amount realized is $470,000. Subtract your adjusted basis from $470,000—not $500,000—to calculate the gain.
How long must you hold property to get the lower long-term capital gains rate?
More than one year. If you sell property held for one year or less, the gain is short-term and taxed as ordinary income. If you sell after holding more than one year, the gain qualifies for the lower long-term rates of 0%, 15%, or 20%. The holding period starts the day after acquisition and ends on the date of sale.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.