When you sell a rental property for more than your purchase price, the profit is subject to capital gains tax. The tax rate depends on how long you’ve owned the property:
• Short-term capital gains (held for one year or less) are taxed as ordinary income.
• Long-term capital gains (held for more than one year) are taxed at preferential rates of 0%, 15%, or 20%, depending on your income bracket.
If you claimed depreciation deductions while owning the property, you must pay depreciation recapture tax when you sell. This portion of your gain is taxed at a maximum rate of 25%.
One way to defer capital gains taxes is by using a 1031 exchange. This IRS provision allows investors to reinvest proceeds into another like-kind property, postponing tax obligations.
High-income investors may also be subject to an additional 3.8% Net Investment Income Tax (NIIT) on rental property sales, depending on their modified adjusted gross income (MAGI).
If you lived in the property for at least two of the last five years, you may qualify for the home sale exclusion of up to $250,000 ($500,000 for married couples) in tax-free gains. However, rental properties do not qualify for this exclusion unless they were your primary residence for a qualifying period.
Certain selling costs—like real estate commissions, legal fees, and advertising costs—may be deducted from your total gains, reducing taxable income.
Final Thoughts: Selling a rental property involves multiple tax considerations, but with smart planning, you can reduce your tax burden and keep more of your profits. Whether you’re considering a 1031 exchange, tracking depreciation recapture, or leveraging deductions, working with a tax professional ensures you navigate the sale strategically. Need guidance? Our experts are here to help!
