Step 1: Compute adjusted basis
Start with your adjusted basis: purchase price, plus capital improvements, minus total depreciation claimed (or allowable). Example: buy for $280,000, add $20,000 in improvements, claim $60,000 in depreciation → adjusted basis = $240,000.
Step 2: Split the gain into two buckets
Compute total gain: net sale price minus adjusted basis. Allocate to (a) depreciation recapture — the portion equal to depreciation claimed, taxed at up to 25%; and (b) long-term capital gain above that, taxed at 0%, 15%, or 20%. Example: sell for $450,000 → total gain $210,000. Recapture: $60,000 at 25% = $15,000. Capital gain: $150,000 at 15% = $22,500. Federal total: $37,500.
Step 3: Add NIIT and state tax
High-income sellers may also owe the 3.8% Net Investment Income Tax on top of federal rates. State income taxes apply in most states — with no 25% federal cap equivalent. Your total tax can be significantly higher than the federal-only estimate. Use the capital gains calculator below for a more complete projection.
Frequently asked questions
What is the step-by-step formula for capital gains on a rental?
(1) Compute adjusted basis. (2) Compute total gain. (3) Allocate to recapture (up to 25%) then capital gains (0/15/20%). (4) Add NIIT if applicable and state tax.
Does depreciation increase capital gains tax?
Yes — depreciation reduces your basis, which increases total gain. It also creates a recapture component taxed separately at up to 25%.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.