How Much Is Capital Gains Tax on Real Estate?

Federal capital gains tax on real estate ranges from 0% to 20% when you have held the property for more than a year, and from 10% to 37% (your ordinary income rate) when you have held it for a year or less. A 3.8% surtax can apply to higher-income sellers, and rental property carries a separate 25% rate on the portion of the gain tied to depreciation. What you actually owe depends on your income, how long you owned the property, whether it was your home or an investment, and whether any exclusions or deferrals apply.

Short-Term vs. Long-Term Rates

The holding period is the first thing that sets your rate. Count from the day after you acquired the property to the day you sell.

Sell within one year and the profit is short-term. It is taxed as ordinary income at 2026 rates that run from 10% to 37%, stacking on top of your wages and other income.¹²

Hold for more than a year and you get the preferential long-term rates of 0%, 15%, or 20%.¹ For 2026, the thresholds are:³

0% on taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household
15% on taxable income from those thresholds up to $545,500 single, $613,700 joint, $579,600 head of household
20% on taxable income above those upper thresholds

The gain does not sit in isolation. It adds to your other taxable income for the year, so a large sale can push part of the profit into the next bracket up. Most homeowners and moderate-income investors land in the 15% bracket; retirees or sellers in a low-income year sometimes qualify for the 0% rate.

Calculating the Gain the Rate Applies To

The rate is only half the equation. The other half is the number it applies to, and that number is not simply sale price minus purchase price. Federal law measures gain as the amount realized on the sale minus your adjusted basis in the property.⁴

Your basis starts with what you paid, plus qualifying settlement costs at purchase such as title insurance, recording fees, survey fees, transfer taxes, and legal fees.⁵ Over the years you owned the property, you add capital improvements: additions like a new bedroom or garage; major replacements like a full roof, central air, or complete rewiring; site work like a paved driveway, fence, or new septic system; and local assessments for water connections, sidewalks, or roads that raised the property’s value. Routine maintenance and minor repairs do not count.⁶ The framework for adjusting basis is set out in Sections 1011 and 1016 of the Internal Revenue Code.⁷

On the selling side, you reduce the sale price by selling expenses: agent commissions, advertising, legal fees tied to the sale, and any loan charges you paid on the buyer’s behalf.⁵ Sale price minus selling expenses gives your amount realized. Amount realized minus adjusted basis gives your taxable gain. Every dollar of documented improvement or selling cost is a dollar the tax rate never touches, which is why keeping receipts and closing statements matters.

The Primary Residence Exclusion

If the property is your main home, Section 121 lets you exclude up to $250,000 of gain if you file single, or up to $500,000 filing jointly.⁸ Anything above the limit is taxed at the applicable long-term rate.

To claim the full exclusion, you must have owned the home for at least two of the five years before the sale, and lived in it as your primary residence for at least two of those same five years. The two years do not have to be consecutive. For couples claiming the $500,000 amount, both spouses must meet the use test, but only one needs to meet the ownership test.⁸ The exclusion can be used only once every two years.

Partial Exclusion for Early Sales

Selling before you have hit the two-year marks can still yield a prorated exclusion if the reason is a job relocation, a health condition, or certain unforeseen circumstances such as divorce, natural disaster, or involuntary conversion.⁸ The exclusion is scaled to the fraction of the two-year period you actually met. A single homeowner who lived in the home one year before a qualifying job move could exclude up to $125,000.

Disability Exception

If you become physically or mentally unable to care for yourself and have owned and used the home for at least one year during the five-year lookback, time spent in a licensed care facility counts toward the use test.⁸

Depreciation Recapture on Rentals

Rental and investment property has its own wrinkle. Any depreciation you were entitled to claim while you owned the property gets “recaptured” at sale and taxed at a maximum rate of 25% under Section 1(h)(1)(E), which is higher than the long-term rates on the rest of the gain.⁹

The math: buy a rental for $300,000, claim $50,000 of depreciation over the years, and sell for $400,000. Your adjusted basis is $250,000, and your total gain is $150,000. The first $50,000 is unrecaptured Section 1250 gain, taxed at up to 25%. The remaining $100,000 is taxed at your regular long-term rate.

Skipping depreciation deductions along the way does not spare you from recapture. The IRS assumes you took the maximum allowable, whether you did or not.

The 3.8% Net Investment Income Tax

Higher-income sellers face an additional 3.8% surtax on top of the regular capital gains rate. The Net Investment Income Tax applies when your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly, and it is charged on the smaller of your net investment income or the amount by which your income exceeds the threshold.¹⁰

Investment properties, second homes, and any primary-residence gain above the Section 121 exclusion count as net investment income. For a seller already in the 20% long-term bracket, the surtax pushes the effective top federal rate to 23.8%. These thresholds are not indexed for inflation, so more sellers cross them each year. The NIIT is reported on Form 8960.

Section 1031 Like-Kind Exchanges

If the property is held for investment or business use, you can defer the entire capital gains bill by exchanging into a replacement property of equal or greater value under Section 1031.¹¹ Since 2018, only real property qualifies.¹²

“Like-kind” is broad for real estate. An apartment building can be exchanged for vacant land, a warehouse, or a retail property, provided both sides are held for investment or business use. Property held primarily for resale, such as a fix-and-flip, does not qualify, and U.S. real estate cannot be exchanged for foreign real estate.¹¹

Most exchanges are deferred rather than simultaneous, and two hard deadlines apply:¹³

You must identify replacement properties in writing within 45 days of the sale
You must close on the replacement within 180 days of the sale, or by your tax return due date with extensions, whichever comes first

Neither deadline can be extended for hardship, only for presidentially declared disasters. A qualified intermediary must hold the sale proceeds; if you touch the money between transactions, the deferral is blown. Any cash or non-like-kind property you receive as part of the deal, known as boot, is taxable in the year of the exchange.¹¹

Inherited Property: Stepped-Up Basis

If you inherited the property, the calculation starts from a different place. Your basis is generally the fair market value on the date of the original owner’s death, not what they originally paid.¹⁴ Only appreciation above that stepped-up value is taxable to the heir.¹⁵

A parent who bought a home for $100,000 that was worth $400,000 at death leaves an heir with a $400,000 basis. Selling shortly afterward for $400,000 produces no taxable gain at all.

State Tax and Estimated Payments

Federal tax is not the whole bill. Most states also tax real estate capital gains, typically as ordinary income under the state income tax, with rates from 0% in states with no income tax to over 13% in the highest-tax states. Your combined federal and state rate can be meaningfully higher than the federal number alone.

A large gain can also trigger a quarterly estimated tax obligation. If you expect to owe at least $1,000 in federal tax after withholding and credits, and withholding will not cover at least 90% of your current-year liability or 100% of last year’s (110% if last year’s adjusted gross income exceeded $150,000), you generally need to make estimated payments.¹⁶ Closings rarely withhold income tax, so this catches many sellers by surprise. If the sale happens midyear, the annualized income installment method lets you concentrate the estimated payment in the quarter the gain occurred rather than spreading it evenly. Missing a required estimated payment produces an underpayment penalty calculated on the shortfall for each quarter it was due.

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Internal Revenue Service. Revenue Procedure 2025-32
4
Office of the Law Revision Counsel. 26 U.S. Code 1001 – Determination of Amount of and Recognition of Gain or Loss
5
Internal Revenue Service. Publication 523 Selling Your Home
6
Internal Revenue Service. Publication 551 Basis of Assets
7
Office of the Law Revision Counsel. 26 U.S. Code 1011 – Adjusted Basis for Determining Gain or Loss
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Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence
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Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed
10
Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
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Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment
12
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
13
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
14
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
15
Internal Revenue Service. Gifts and Inheritances
16
Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.