How Much Is Capital Gains Tax on Property Sales?

Federal capital gains tax on property sales runs from 0% to 20% for property you held more than a year, plus a possible 3.8% surtax for higher earners. Property held one year or less is taxed at ordinary income rates of 10% to 37%. The actual bill depends on your filing status, your taxable income, whether the property was your home or an investment, and which exclusions or deferrals you qualify for.

Why the One-Year Mark Matters

Property held for one year or less produces a short-term gain taxed at ordinary rates. Property held more than one year produces a long-term gain taxed at preferential rates.¹

The clock starts the day after you acquire the property and ends on the sale date. Buy on March 15, 2025, and you need to sell on or after March 16, 2026, to get long-term treatment. Sell on March 15 or earlier and the gain is short-term.

2026 Long-Term Rates

Long-term gains are taxed at 0%, 15%, or 20% based on your taxable income after deductions.² Most sellers land in the 15% bracket. For 2026, the thresholds are:³

0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), $66,200 (head of household), or $49,450 (married filing separately).
15% rate: taxable income from $49,451 to $545,500 (single), $98,901 to $613,700 (married filing jointly), $66,201 to $579,600 (head of household), or $49,451 to $306,850 (married filing separately).
20% rate: taxable income above $545,500 (single), $613,700 (married filing jointly), $579,600 (head of household), or $306,850 (married filing separately).

Short-Term Rates

Short-term gains get no preferential rate. The gain is added to your wages, self-employment income, and other ordinary income, and taxed at rates from 10% to 37% for 2026.³ A quick flip can easily push a chunk of the gain into a higher bracket than what you’d pay if you held for a year and a day.

The 3.8% Net Investment Income Tax

High-income sellers can owe an additional 3.8% on top of the capital gains rate. The Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 (single or head of household), $250,000 (married filing jointly), or $125,000 (married filing separately).⁴ These thresholds are set by statute and are not indexed for inflation.⁵

The 3.8% applies to the lesser of your net investment income or the amount your modified AGI exceeds your threshold. A single filer with $250,000 of income and $80,000 in capital gains pays 3.8% on $50,000, not the full $80,000. Combined with the top 20% rate, the highest federal rate on a property sale is 23.8%.

Depreciation Recapture on Rental or Business Property

If you claimed depreciation while renting out the property or using it in a business, the portion of your gain equal to that depreciation is taxed at up to 25% rather than the standard long-term rates.⁶ This is called unrecaptured Section 1250 gain, and the 25% ceiling applies up to the total depreciation you claimed (or were allowed to claim).

Say you bought a rental for $300,000, claimed $60,000 in depreciation, and sold for $400,000. The first $60,000 of gain is taxed at up to 25%, and the remaining $40,000 at your regular long-term rate. For high earners, the 3.8% surtax can stack on top of the 25%, pushing the effective rate on the recapture portion to 28.8%.

How to Calculate the Taxable Gain

Your gain isn’t just sale price minus purchase price. The formula is amount realized minus adjusted basis.⁷ Both sides of that equation can be adjusted in ways that lower your tax.

Adjusted Basis

Basis starts with your original purchase price plus acquisition closing costs such as title insurance, recording fees, survey fees, legal fees, and transfer taxes.⁸ It goes up when you make capital improvements that add value or extend the property’s useful life, such as a new roof, additional rooms, a replaced HVAC system, or a full kitchen renovation.⁹ Routine maintenance and repairs don’t count.

Basis goes down by the total depreciation you claimed or were allowed to claim on rental or business use. Bought for $300,000, spent $50,000 on capital improvements, claimed $40,000 in depreciation: adjusted basis is $310,000.

Amount Realized

Amount realized is the sale price minus selling expenses. Common selling expenses include real estate commissions, transfer taxes paid by the seller, and legal fees at closing.⁸ A $500,000 sale with $30,000 in commissions and closing costs produces $470,000 of amount realized. Subtract the adjusted basis and you have the taxable gain.

Inherited Property

If you inherited the property, your basis is generally the fair market value on the date the previous owner died, not what they originally paid.¹⁰ This stepped-up basis can wipe out most of the gain. A parent who bought a home for $100,000 decades ago and leaves it worth $400,000 gives the heir a $400,000 basis. Sell for $420,000 and only $20,000 is taxable. The estate executor can supply the date-of-death valuation, and an alternate valuation date sometimes applies if the executor elects it on the estate tax return.

The Home Sale Exclusion

If the property is your primary residence, you may be able to exclude up to $250,000 of gain from federal tax, or up to $500,000 if you’re married filing jointly.¹¹ Gain within these limits is completely excluded.

To qualify, you must meet two tests during the five-year period ending on the sale date. You must have owned the home for at least two of those five years, and used it as your primary residence for at least two of those five years. The two years don’t have to be consecutive. For couples claiming the full $500,000, both spouses must meet the use test, but only one needs to meet the ownership test.¹¹ Any profit above the limit is taxed at the applicable long-term capital gains rate.

Partial Exclusion for Early Sales

Sell before hitting the two-year mark and you may still get a partial exclusion if the sale was primarily due to a job relocation, a health issue, or an unforeseeable event.⁸ For a work move, the new workplace generally must be at least 50 miles farther from the home than the previous one. For a health move, the sale must be tied to obtaining or providing care for you or a qualifying family member. The partial exclusion is prorated based on how much of the two-year requirement you completed.

Deferring the Tax With a 1031 Exchange

Sell investment or business real estate and reinvest the proceeds into similar property, and you can defer the entire capital gains tax through a like-kind exchange. Both the property sold and the property bought must be held for investment or business use. A personal home or vacation property does not qualify.¹²

The timelines are strict and counted in calendar days. You must identify potential replacement properties in writing within 45 days of selling the original, and close on the replacement within 180 days of the sale or by your tax return due date including extensions, whichever comes first.¹³ Miss either deadline and the transaction becomes a fully taxable sale.

You cannot touch the sale proceeds. A qualified intermediary, meaning an independent third party who is not your agent, broker, attorney, or accountant, must hold the funds between the sale and the purchase.¹²

Spreading the Tax With an Installment Sale

Rather than paying all the tax in the year of sale, you can finance the sale yourself and spread the gain over the years you collect payments. When at least one payment is received after the tax year of the sale, you report the gain proportionally as payments come in.¹⁴

Each payment breaks into three pieces: a return of basis (not taxed), gain (taxed at capital gains rates), and interest (taxed as ordinary income). The taxable share of each principal payment equals your gross profit percentage, which is total gain divided by contract price. If gain is 40% of the contract price, 40% of each principal payment is taxable as capital gain.¹⁴

The method is optional. You can elect out and report all the gain up front. Note that installment reporting only applies to gains: a loss must be deducted entirely in the year of sale.

Offsetting Gains With Capital Losses

Losses on investment property can offset your gains. Short-term losses first offset short-term gains and long-term losses first offset long-term gains, with any remainder netting against the other category. If net losses still exceed net gains, up to $3,000 of the excess can offset ordinary income each year ($1,500 if married filing separately), and any unused loss carries forward.¹⁵

One limit worth knowing: a loss on the sale of your personal residence is not deductible. Only losses on property held for investment or business use, such as a rental house or investment land, count.

Estimated Tax Payments After a Large Sale

A big gain can trigger a requirement to pay estimated tax during the year. You generally need to make estimated payments if you expect to owe at least $1,000 after withholding and refundable credits, and withholding will cover less than 90% of your current-year tax or 100% of your prior-year tax (110% if prior-year AGI exceeded $150,000).¹⁶ If the sale lands mid-year, you can annualize your income and pay a larger amount for the quarter of the sale rather than spreading it evenly. Missing required estimated payments can trigger underpayment penalties even if you pay the full balance at filing.

State Tax on Top

Federal is not the only layer. Most states tax capital gains as ordinary income, so the gain is added to your other state-taxable income. State rates range from 0% in states with no income tax to over 13% in the highest-tax states. Some states offer preferential treatment for long-term gains, lower rates for certain property types, or specific real estate exemptions. Check your state’s tax agency for the rules that apply to your sale.

Reporting the Sale

Report the sale on IRS Form 8949 with the property description, acquisition and sale dates, sale proceeds, and adjusted basis.¹⁷ If you received a Form 1099-S, Form 8949 is where you reconcile the reported figures with your own records.

Totals flow from Form 8949 to Schedule D of Form 1040, where all capital gains and losses for the year are combined and the net result carries into your return.¹⁸ If you’re claiming the home sale exclusion and the gain fits within the $250,000 or $500,000 limit, you generally don’t need to report the sale at all, unless you received a Form 1099-S. Get the basis adjustments, selling expenses, and exclusions right the first time; errors can produce penalties or processing delays.

1
Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
6
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
7
Office of the Law Revision Counsel. 26 USC 1011 – Adjusted Basis for Determining Gain or Loss
8
Internal Revenue Service. Publication 523, Selling Your Home
9
Office of the Law Revision Counsel. 26 US Code 1016 – Adjustments to Basis
10
Internal Revenue Service. Gifts and Inheritances
11
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
12
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
13
Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment
14
Internal Revenue Service. Publication 537, Installment Sales
15
Office of the Law Revision Counsel. 26 US Code 1211 – Limitation on Capital Losses
16
Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.
17
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
18
Internal Revenue Service. Instructions for Schedule D (Form 1040)