How Much Tax Do You Pay When Selling Investment Property?

When you sell an investment property, the tax you pay stacks in layers: federal capital gains tax of 0% to 20% on long-term profit (or your ordinary rate up to 37% if you owned it a year or less), depreciation recapture of up to 25% on the portion of the gain tied to depreciation you claimed, a 3.8% net investment income surtax if your income is high enough, and state income tax on top. How much you actually owe depends on your holding period, your total income for the year, how much depreciation you took, and what strategies you use to defer or spread the bill.

Figuring the Gain the IRS Will Tax

Before any rate applies, you need the number those rates hit. That number is your amount realized from the sale minus your adjusted basis in the property.

Your Adjusted Basis

Adjusted basis starts with what you originally paid, including acquisition costs like title insurance and recording fees.¹ Add the cost of capital improvements — upgrades that increase value, extend useful life, or adapt the property to a new use, such as a new roof, a new HVAC system, or an added bedroom. Routine repairs like fixing a faucet or repainting do not count.

Then subtract every dollar of depreciation you claimed while renting the property. Residential rental property is depreciated over 27.5 years on a straight-line basis.² If you were entitled to claim depreciation and skipped it, the IRS still reduces your basis by the amount you were allowed to take.

Selling Expenses

Your amount realized is not the contract price. Subtract real estate commissions, attorney fees, title and escrow charges, transfer taxes, and other closing costs tied to the sale. A $400,000 sale with $24,000 in commissions and $3,000 in other closing costs yields an amount realized of $373,000. Keep every settlement statement and receipt; each dollar of legitimate selling expense reduces your taxable gain dollar for dollar.

Short-Term vs. Long-Term Capital Gains Rates

Holding period sets the rate schedule. Own the property for one year or less and any profit is a short-term capital gain, taxed at your ordinary federal income tax rate, which runs from 10% to 37% in 2026.³ A quick flip with a big profit can push you into a much higher bracket for the year.

Hold for more than one year and the profit qualifies for long-term rates of 0%, 15%, or 20%, based on your total taxable income.⁴ For the 2026 tax year, the thresholds for single filers and married couples filing jointly are:⁵

0% rate: taxable income up to $49,450 (single) or $98,900 (married filing jointly).
15% rate: taxable income from $49,451 to $545,500 (single) or $98,901 to $613,700 (married filing jointly).
20% rate: taxable income above $545,500 (single) or $613,700 (married filing jointly).

Most investment property sellers land in the 15% bracket. The 20% rate applies only to the portion of taxable income that exceeds the upper threshold, not to the entire gain.⁶

Depreciation Recapture at Up to 25%

Every year you rented out the property, depreciation lowered your taxable rental income. When you sell, the IRS wants some of that benefit back. The portion of your gain equal to the depreciation you claimed (or were allowed to claim) is treated as “unrecaptured Section 1250 gain” and taxed at a rate of up to 25%, which is typically higher than the long-term capital gains rate that applies to the rest of your profit.⁷

The gain splits into two pieces: recapture first, then appreciation. Missing that split is a common error that can trigger underpayment penalties and interest during an IRS review.⁸

The 3.8% Net Investment Income Tax

High earners owe an additional 3.8% surtax on net investment income, which includes the gain from selling investment property. The tax applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds a fixed threshold.⁹ Those thresholds are $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately, and they have not been adjusted for inflation since the tax took effect in 2013. The surtax applies to both short-term and long-term gains.

Putting the Layers Together

Say you bought a rental property for $300,000, put $50,000 into capital improvements, and claimed $40,000 in depreciation. Your adjusted basis is $310,000. You sell for $400,000 (setting selling expenses aside for simplicity), producing a $90,000 gain.¹

The first $40,000 of that gain is unrecaptured Section 1250 gain taxed at up to 25%. The remaining $50,000 is taxed at your applicable long-term capital gains rate of 0%, 15%, or 20%. If your income also pushes you over the net investment income threshold, add 3.8% on top of the qualifying portion. State income tax stacks on after that.

If the Property Was Once Your Home

If you lived in the property as your main home before renting it out, you may qualify for a partial exclusion. Federal law lets you exclude up to $250,000 of gain ($500,000 for married couples filing jointly) on the sale of a principal residence, as long as you owned and used it as your home for at least two of the five years before the sale.¹⁰ Living there two years and renting it out for three still meets the test.

One important limit: the exclusion does not cover the portion of your gain equal to the depreciation you claimed during the rental period. That amount stays subject to the 25% recapture rate.⁷

Ways to Defer or Spread the Bill

1031 Exchange

A 1031 exchange lets you roll the proceeds from selling one investment property into another and defer the tax rather than pay it at closing.¹¹ Both properties must be real property held for investment or business use, both must be inside the United States, and property held primarily for resale (a flip) does not qualify.

Two deadlines run from the day you close on the old property, and neither can be extended except by a presidentially declared disaster:¹²

Within 45 days, you must identify replacement properties in writing and deliver that identification to a qualified intermediary or to the seller of the replacement property.
Within 180 days (or by the due date of your tax return for the year of the sale, whichever comes first), you must close on the replacement property.

Miss either deadline and the exchange fails; you owe tax on the full gain as though no exchange had been attempted. Touching the sale proceeds yourself between transactions can also disqualify the deal, which is why most sellers use a qualified intermediary to hold the funds.

Installment Sale

If you take at least one payment after the close of the year the sale occurs, the IRS automatically treats the deal as an installment sale unless you elect otherwise.¹³ You report only a portion of each payment as taxable gain, based on the ratio of your gross profit to the total sale price; the rest is a tax-free return of basis. If your gross profit ratio is 60%, then 60% of every payment is gain and 40% is basis recovery. Spreading the income over multiple years can keep you in a lower bracket. The installment method does not apply to dealer sales.

Reporting and Paying On Time

Depreciation recapture is reported on Form 4797, Part III, which calculates the ordinary income portion of your gain.¹⁴ Gain above the recapture amount goes on Form 8949 and flows to Schedule D of your Form 1040.¹⁵

A large gain can leave you owing far more than your regular withholding covers. If you expect to owe at least $1,000 after withholding and refundable credits, the IRS requires quarterly estimated tax payments.¹⁶ The quarterly deadlines fall on April 15, June 15, September 15, and January 15 of the following year, covering income earned in the periods that end just before each date.¹⁷ A July closing generally means an estimated payment is due September 15; waiting until the following April can trigger underpayment penalties and interest.

State Tax and Transfer Tax

Most states treat the gain as taxable income, and rates run from zero in states without an income tax to over 13% at the top end. Many states simply add the gain to your ordinary income and apply their standard brackets; a few have separate rates or exemptions. You report the gain on your state return for the same year as your federal return.

Many states and localities also charge a transfer tax when property changes hands, calculated as a percentage of the sale price and paid at closing. Rates vary widely by jurisdiction, and whether the buyer, seller, or both pay depends on local custom and the sale contract. Your closing agent or settlement attorney will itemize these on the settlement statement.

1
Office of the Law Revision Counsel. 26 USC 1011 – Adjusted Basis for Determining Gain or Loss
2
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
eCFR. 26 CFR Part 1 – General Rules for Determining Capital Gains and Losses
5
Internal Revenue Service. Revenue Procedure 2025-32
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
8
Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty
9
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
10
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
11
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
12
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
13
Office of the Law Revision Counsel. 26 USC 453 – Installment Method
14
Internal Revenue Service. Instructions for Form 4797
15
Internal Revenue Service. Sales, Trades, Exchanges
16
Internal Revenue Service. Estimated Tax
17
Internal Revenue Service. When Are Quarterly Estimated Tax Payments Due?