Real Estate Tax Calc
What is capital gains tax on property?
Capital gains tax is a federal (and often state) income tax on the profit from selling real property. It is triggered by a sale or exchange — a one-time event. The key features:
- What it taxes: Your gain — the difference between what you received (amount realized) and what the property cost you (adjusted basis)
- When it applies: At the time of sale (you report it on the tax return for the year of sale)
- Who levies it: Federal government (IRS) under the Internal Revenue Code, plus most state income tax authorities
- Key rates (federal): 0%, 15%, or 20% for long-term gains (held >1 year); up to 37% for short-term; up to 25% for unrecaptured §1250 depreciation recapture; 3.8% NIIT may apply
- Primary form: Form 4797 (investment/rental property), Schedule D (capital gains summary), Form 1040
What is property tax?
Property tax (also called "real property tax" or "ad valorem tax") is a recurring local tax on the assessed value of real estate. It is an ownership tax — you pay it every year as long as you own the property, regardless of whether you have a gain, income, or plan to sell. The key features:
- What it taxes: The assessed value of the property as determined by the local assessor's office
- When it applies: Annually (often paid in installments, semi-annually or quarterly depending on jurisdiction)
- Who levies it: Local governments — counties, municipalities, school districts, special districts — never the federal government
- Typical rates: 0.5%–2.5% of assessed value annually, varying significantly by state and county (California vs. New Jersey, for example, have very different effective rates)
- Deductibility: For rental property, fully deductible on Schedule E. For primary residence, deductible as SALT on Schedule A up to the $10,000 cap (Tax Cuts and Jobs Act of 2017)
Side-by-side comparison
| Feature | Capital Gains Tax | Property Tax |
|---|---|---|
| What is taxed | Profit on sale (gain) | Assessed value of property |
| When paid | Once, at time of sale | Annually, while you own it |
| Who collects | IRS + state income tax | County/municipal government |
| Typical rate | 0–37% (varies by type and income) | ~0.5–2.5% of assessed value/year |
| Basis of tax | Your gain (price − adjusted basis) | Assessed value (set by assessor) |
| Can be deferred | Yes (§1031 exchange, §1033, OZ) | Some states allow senior deferrals |
| Can be excluded | Yes (§121 exclusion up to $500K MFJ) | Partial exemptions (homestead, veterans, senior) |
| Tax form | Form 4797 / Schedule D / Form 1040 | Local assessment notice (no federal form) |
| Calculator | Capital Gains Tax Calculator | Property Tax Calculator |
How capital gains tax is calculated
For investment or rental property held more than 1 year:
- Amount realized = Sale price − selling costs (commissions, closing fees)
- Adjusted basis = Purchase price + improvements − MACRS depreciation
- Total gain = Amount realized − Adjusted basis
- Tier 1: Depreciation recapture (unrecaptured §1250 gain) taxed at max 25%
- Tier 2: Remaining §1231 gain taxed at 0%/15%/20% depending on income
- Tier 3: 3.8% NIIT if MAGI exceeds $200K (single) / $250K (MFJ)
Example: Sell rental for $500,000. Adjusted basis $280,000 ($350K purchase + $20K improvements − $90K depreciation). Total gain $220,000. Tier 1: $90K × 25% = $22,500. Tier 2: $130K × 15% = $19,500. Total federal tax ≈ $42,000.
How property tax is calculated
Property tax calculation varies by jurisdiction, but the general formula is:
Annual property tax = Assessed value × Effective tax rate
Assessed value is typically set by the local assessor at some percentage of market value (some jurisdictions assess at 100% of market value; others at a fraction). The effective tax rate combines all local levies — county, municipality, school district, and special districts.
Example: Property market value $500,000. Assessed at 80% = $400,000. Combined tax rate 1.8% = $7,200/year in property tax. This is independent of any capital gain; you would pay this every year you own the property.
Do property taxes reduce capital gains?
No — property taxes do not directly reduce capital gains tax. They are deductible as operating expenses for rental property on Schedule E, which reduces your ordinary income tax each year. But they do not add to your property's adjusted basis and cannot be claimed as an offset against gain on sale.
The one indirect connection: for primary residence owners with a mortgage, property taxes (up to the $10,000 SALT cap) reduce your ordinary income tax each year on Schedule A. This reduces your overall tax burden but is not a capital gains offset.
Strategies to reduce each tax
Reducing capital gains tax
- Hold property more than 1 year (long-term rates vs. ordinary income rates)
- Track all capital improvements — they increase basis and reduce gain
- Use a §1031 like-kind exchange to defer gain into a new property
- Apply the §121 exclusion (up to $250K/$500K MFJ) for your primary residence
- Time the sale to fall in a year with lower income (lower LT CG rate bracket)
- Invest gain in a Qualified Opportunity Zone (QOZ) to defer and potentially reduce tax
- Hold to death — beneficiaries receive a stepped-up basis under IRC §1014
Reducing property tax
- Appeal your assessment if the assessed value appears higher than market value
- Apply for all available exemptions — homestead, senior, veteran, disabled
- Consider the property tax climate when choosing where to invest (effective rates vary from under 0.3% to over 2.5% across US states)
Frequently asked questions
Is capital gains tax the same as property tax?
No. Capital gains tax is a federal (and often state) income tax on the profit from selling property. Property tax is a local/county tax on the assessed value of the property while you own it, paid annually. They are two entirely different taxes levied at different levels of government, applying at different times, and based on different measures.
Can property taxes be deducted to reduce capital gains?
No. Property taxes paid while you own a property are deductible as ordinary business/rental expenses (Schedule E for rentals, or up to $10,000 SALT cap for primary residences on Schedule A). They do not directly reduce your capital gains tax. They are not added to your adjusted basis and cannot be deducted against gain on sale.
Do I owe both capital gains tax and property tax when I sell?
You may owe capital gains tax on the sale itself. Property taxes are typically prorated at closing between buyer and seller — you pay for the period you owned the property, and the buyer takes over from the closing date. The property tax proration reduces your net proceeds but is not a separate tax bill that arises just because you sold. The selling costs (including prorated property taxes) reduce your amount realized.
What is the capital gains tax rate on real estate?
For investment property held more than one year (long-term), federal capital gains tax rates are 0%, 15%, or 20% depending on taxable income. Depreciation recapture is taxed at a maximum 25% rate. The 3.8% Net Investment Income Tax may also apply above $200,000/$250,000 MAGI. Short-term gains (held one year or less) are taxed as ordinary income up to 37%.
Is property tax deductible for rental property?
Yes. Property taxes on rental property are fully deductible as an ordinary business expense on Schedule E (Supplemental Income and Loss), with no SALT cap limitation. The $10,000 SALT limitation under the Tax Cuts and Jobs Act of 2017 applies only to personal-use property deducted on Schedule A, not to rental or business property.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.