The Full Tax Bill When You Sell a Rental (It Is Not Just 15%)

Ask a landlord what they will owe when they sell and the usual answer is "15% of the profit". On a house bought for $244,000 and sold for $360,000, that back-of-envelope math gives $17,400. The actual bill in the worked example below is $42,900, about two and a half times as much, on the same sale.

Reviewed against IRS Publication 544 on asset dispositions and Form 8824 exchange instructions and IRS Publication 925 on passive activities and amounts at risk on October 1, 2026. Use the instructions for your filing year; the examples are planning illustrations, not a prepared tax return.

The gap comes from three things the quick estimate leaves out. The taxable gain is larger than sale price minus purchase price, because depreciation has been lowering your basis every year. Part of that gain is taxed at up to 25%, not 15%. And two more taxes sit on top: the 3.8% net investment income tax and your state. Capital gains tax on selling rental property is a stack, and you should price the whole stack before you sign a listing agreement.

The four layers: capital gains, recapture, NIIT, state

A rental sale held more than a year produces one gain figure that gets taxed in up to four ways.

Layer 1: long-term capital gains. The part of your gain that comes from appreciation is taxed at 0%, 15% or 20%, depending on your taxable income for the year. The gain itself counts toward that income, so a large sale can push part of the gain into a higher band than you normally occupy.

Layer 2: unrecaptured Section 1250 gain. The part of your gain that exists only because you took depreciation on the structure is taxed at your ordinary rate, capped at 25%. For most sellers with a full-time income, the cap is the rate. This applies to depreciation "allowed or allowable", so skipping depreciation on past returns does not shrink this layer. Our post on depreciation recapture covers this layer in depth, including what happens to 5 and 7 year components from a cost segregation study, which are recaptured at full ordinary rates.

Layer 3: the net investment income tax. A 3.8% surtax applies to investment income, including gains from a rental sale, once your modified adjusted gross income passes a threshold set by filing status. The tax hits the lesser of your net investment income or the amount by which your income exceeds the threshold. A seller whose salary is already over the line pays 3.8% on the entire gain. A seller who starts below it may still cross it because of the sale.

Layer 4: state income tax. Most states with an income tax treat capital gains as ordinary income and tax them at the regular state rate. A few states have no income tax. The state that taxes the sale is generally the state where the property sits, and your home state may tax it too with a credit for what the other state collected.

Computing your real gain: basis is not what you paid

Gain equals the amount realized minus your adjusted basis. Both terms differ from the numbers owners carry in their heads.

Amount realized is the contract price less selling costs: commissions, transfer taxes, title and escrow fees, attorney fees, and seller-paid concessions. Your loan payoff is not a selling cost. Debt affects the cash you walk away with and has nothing to do with the gain.

Adjusted basis starts at what you paid and then moves in both directions.

Depreciation is the line that surprises people. A building depreciated over 27.5 years loses about 3.6% of its depreciable cost from your basis each year. After ten years, more than a third of the building's cost has moved out of basis and into future taxable gain. The house may have gone up in value the whole time. For tax purposes it has been going down. The depreciation calculator will reproduce your schedule if you do not have it in hand.

The practical consequence: an owner who sells for exactly what they paid still has a taxable gain equal to the depreciation taken, less selling costs.

Worked example: the full stack on a $150,000 gain

This is an example with invented numbers. Depreciation is simplified to full years, and the rates are labeled assumptions, not a statement of what you will pay.

The purchase. A married couple buys a single family rental for $244,000 and pays $6,000 of closing costs that are added to basis. Their starting basis is $250,000. They allocate $57,500 to land and $192,500 to the building. They finance it with an example loan of $195,200 at 6% for 30 years.

The hold. They own it for ten full years. Building depreciation is $192,500 divided by 27.5, or $7,000 a year, which is $70,000 over the hold. At the start of year 6 they replace the roof for $11,000. That is a capital improvement, depreciated at $400 a year, or $2,000 over the five remaining years. Total depreciation taken: $72,000.

The sale. They sell for $360,000. The commission is 5%, or $18,000, and other selling costs are $3,000.

Now split the gain. The first $72,000 is unrecaptured Section 1250 gain, equal to the depreciation taken. The remaining $78,000 is ordinary long-term capital gain from appreciation.

The rate assumptions use a 25% rate on the unrecaptured Section 1250 layer and 15% on the remaining long-term gain. They are isolated planning inputs, not a fully modeled joint-return bracket calculation. Their income was already above the NIIT threshold before the sale, so the full gain is subject to the 3.8%. Their state taxes the gain at an example flat 5%.

That is 28.6% of the $150,000 gain. The shortcut many owners use, 15% of sale price minus purchase price, is 15% of $116,000, or $17,400. Even applying 15% to the correct $150,000 gain gives only $22,500. The real bill is $20,400 more than that.

What it does to the closing check. After ten years the loan balance is $163,355. Cash at closing is $339,000 less $163,355, or $175,645. Subtract $42,900 and the couple keeps $132,745. The tax takes 24% of the cash they receive at the closing table, and none of it is withheld for them. It comes due with the return, or sooner through estimated payments.

How the total moves under different example assumptions, same sale:

Even the lowest illustrative row exceeds 15%. The actual unrecaptured Section 1250 rate can be below its 25% maximum, and losses or other return details can change the result.

The rates that apply to each layer in 2026

The structure of these rates is fixed in the tax code. The income levels where they switch are adjusted most years, so look those up for your filing status before you rely on an estimate.

Three notes on reading that table.

• Property held one year or less gets none of the long-term rates. The gain does not receive long-term capital-gain treatment; apply the asset's ordinary, short-term and recapture rules.
• Income stacks in a set order. Ordinary income fills the brackets first, and the gain sits on top. A couple with modest wages may find part of the appreciation layer taxed at 0% and part at 15%.
• A real estate professional whose rentals are a trade or business may be able to keep the gain out of the 3.8% tax. That is a facts-and-records question for a CPA.

The levers: 1031, installment sales, harvesting, timing

Each lever works on different layers. None is free.

1031 exchange. A qualifying exchange can defer eligible real-property gain. For a deferred exchange, identify replacement property within 45 days and receive it by the earlier of 180 days or the return due date including extensions. Arrange the qualified intermediary before receiving proceeds. Cash and net debt relief can create recognized gain up to the applicable realized gain, with debt-offset rules and separate recapture issues requiring review. The deferred gain and the old depreciation carry into the new property, so the bill is postponed, not erased. The mechanics are in our 1031 exchange basics guide.

Installment sale. If you carry the financing, you recognize gain as the principal comes in, which can keep each year's income under the NIIT threshold and out of the 20% band. Two cautions. Section 1245 recapture is recognized in full in the year of sale no matter when you are paid, and the 25% layer is generally counted first as payments arrive, ahead of the 15% gain. You also take on the risk that the buyer stops paying.

Released passive losses. If your income was too high to use rental losses over the years, they have been accumulating on Form 8582. A fully taxable disposition of the entire activity to an unrelated buyer generally releases them, subject to activity grouping and other limitations. At an independently assumed 32% marginal benefit, a usable $20,000 deduction would reduce tax by $6,400. Do not subtract that amount mechanically from the example bill; released losses change the full return and its rate ordering. A 1031 exchange does not release them.

Loss harvesting. Capital losses from stocks or other assets offset the gain. The savings depend on federal gain-netting rules, any NIIT effect, state conformity and other gains or losses. Have the preparer compare the complete return with and without the proposed loss; adding three marginal percentages does not establish a minimum saving.

Timing. Closing in a different tax year changes the reporting year, but estimated-payment dates and safe-harbor requirements still matter. Selling in a year with low income (between jobs, the first year of retirement) can pull more of the appreciation layer into the 0% or 15% bands and can drop the recapture layer below 25% if your ordinary bracket is lower than that.

Not selling. Inherited property generally receives a basis adjustment, often to date-of-death fair market value, subject to ownership and estate rules. That adjustment can be down as well as up; it is not a universal promise about every asset or ownership structure. For an older owner, that changes the math on every other option.

One lever that disappoints: moving into the rental to claim the home sale exclusion. Depreciation taken after May 1997 is never covered by that exclusion, and the years the property was a rental generally reduce the excludable share. Get advice before planning around it.

Estimate your bill before you sign the listing

The tax is knowable to within a few thousand dollars months before you sell. Work through it in this order.

1. Pull your depreciation schedule and total everything taken since purchase. If you skipped years, use what you were entitled to take.
2. Rebuild adjusted basis: purchase price, plus capitalized closing costs, plus improvements, minus that depreciation.
3. Estimate amount realized from a realistic price and 6% to 8% in selling costs as a rule of thumb, then confirm local transfer taxes.
4. Allocate gain by asset and tax character, then apply the relevant rates, including the maximum 25% rule where appropriate.
5. Add 3.8% if your income with the sale will be over the NIIT threshold, and add your state.
6. Include eligible released passive losses and recompute the complete tax result; do not assume a fixed-rate credit.
7. Compare the result to your expected closing cash, and plan an estimated tax payment for the quarter of the sale.

Then run the alternative. The free 1031 exchange calculator computes the deferral side of this same bill: how much tax an exchange would postpone, how much replacement property you need to buy, and what boot would cost. Put your numbers through both paths before you list. A $42,900 difference in cash available to reinvest is often what decides between selling outright and exchanging.

This article is general information, not tax advice. Rules change and individual situations differ: confirm anything you plan to act on with a CPA.

Keep a separate operating case in the single-family calculator, using actual financing and cash expenses before adding any assumed tax benefit.