The short-term capital gains tax on property is the federal tax you pay on profit from selling real estate you owned for one year or less. That profit is taxed as ordinary income, meaning it falls into the same brackets as your wages — between 10% and 37% for 2026 — and a 3.8% surtax may apply on top if your income is high enough. State income tax usually adds more.
What Counts as Short-Term
A short-term capital gain is profit from selling a capital asset held for one year or less.1Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses The clock starts the day after you acquire the property and runs through the day you sell it. Both dates come from your settlement statements: the closing date on your purchase and the closing date on your sale.
To reach long-term treatment, you need more than one full year of holding. Selling on the one-year anniversary is still short-term. A single day can be the difference between a 37% ordinary rate and a 20% long-term rate, so check your closing dates carefully. If you’re a few weeks from the threshold, waiting almost always saves money.
Two situations sit outside this rule. Inherited real estate is always treated as long-term regardless of how quickly you sell. Gifted property tacks the donor’s holding period onto yours, so if the previous owner held it for years, the sale is long-term even if you close soon after receiving it.
Figuring Out the Taxable Gain
The IRS taxes profit, not proceeds. The number that lands on your return is the sale price minus selling costs minus your adjusted basis in the property.
Your Cost Basis
Basis starts with what you paid for the property, including recording fees, transfer taxes, title insurance, and legal fees paid at closing.2Internal Revenue Service. Publication 551 – Basis of Assets These closing costs aren’t deductions; they lift your basis, which shrinks your taxable gain when you sell.
Capital Improvements
Any permanent improvement that adds value, extends the property’s useful life, or adapts it to a new use increases your basis. Routine maintenance does not.3Internal Revenue Service. Publication 523 – Selling Your Home Improvements that qualify include:
- Additions such as a new bedroom, bathroom, deck, garage, or porch
- Major systems: a new roof, HVAC, central air, wiring, or security system
- Grounds work like landscaping, a driveway, fence, retaining wall, or swimming pool
- Interior projects: kitchen remodels, new flooring, built-in appliances, a fireplace
Painting, fixing leaks, patching cracks, and replacing broken hardware are maintenance and don’t change basis. One nuance worth knowing: repairs done as part of a larger renovation can count as improvements. Replacing one broken window is a repair; replacing every window in the house as one project counts as an improvement.
Selling Expenses
Real estate commissions (often around 5% of the sale price), attorney fees, seller-side title insurance, and transfer taxes paid by the seller reduce the gain. Subtract them from the sale price to get your amount realized, then subtract your adjusted basis. What’s left is your taxable capital gain.
Keep every receipt and invoice. If the IRS challenges your basis, you carry the burden of proof. Hold onto records for at least three years after the return that reports the sale, longer if you underreported income by more than 25%.4Internal Revenue Service. How Long Should I Keep Records
2026 Federal Rates on the Gain
Short-term gains are taxed as ordinary income. The IRS stacks the gain on top of your wages, interest, and other earnings, and the combined total decides which bracket applies to the top slice.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Single filers, 2026:
- 10% up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% over $640,600
Married filing jointly, 2026:
- 10% up to $24,800
- 12% from $24,801 to $100,800
- 22% from $100,801 to $211,400
- 24% from $211,401 to $403,550
- 32% from $403,551 to $512,450
- 35% from $512,451 to $768,700
- 37% over $768,700
Brackets are progressive. A property sale that pushes you into a higher bracket doesn’t raise the rate on your earlier income; only the dollars above each threshold pay the next rate. A single filer earning $80,000 in wages who books a $40,000 flip profit has $120,000 of taxable income. The gain itself falls mostly in the 22% and 24% brackets. Wage income below those thresholds keeps its lower rates.
Even so, a large gain raises your average effective rate for the year, sometimes by several points. Someone whose wages usually blend to 14% can find themselves closer to 19% after a profitable flip. Planning for the increase before closing is the difference between a manageable April bill and a painful one.
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% surtax on net investment income, and short-term real estate gains count. The tax applies once your modified adjusted gross income crosses these thresholds:6Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
The 3.8% applies to the smaller of your net investment income or the amount your MAGI exceeds the threshold. Take a married couple with $300,000 in wages and a $100,000 short-term gain: total income is $400,000, or $150,000 above the $250,000 threshold. Net investment income is $100,000. Because $100,000 is less than $150,000, the surtax hits the full $100,000, adding $3,800 to their federal bill.
These thresholds are not indexed for inflation. A single profitable sale can push someone over even when their regular salary sits well below.
State Tax Adds to the Total
Federal isn’t the whole picture. Most states tax capital gains as ordinary income, and a handful impose rates above 10%. Eight states have no individual income tax, so no state capital gains tax either. The rest fall roughly between 2% and 13% depending on income level. In a high-tax state at the top brackets, the combined federal and state rate on a short-term gain can approach 50%. Check your state’s rules before estimating what you’ll owe.
If the Property Was a Rental: Depreciation Recapture
Renting the property before selling, even briefly, adds a layer. Residential rental property is depreciated over 27.5 years, and each year of depreciation reduces your basis. When you sell, the IRS recaptures that depreciation.
For property held more than a year, recapture is taxed at a maximum rate of 25% as unrecaptured Section 1250 gain.7Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed For a short-term sale, the mechanics are simpler and harsher: the entire gain is ordinary income, so the depreciation portion just folds into the rest and gets taxed at your ordinary rate, up to 37%. There’s no separate favorable rate on a short-term sale.
A trap that catches landlords: recapture applies to depreciation you were allowed to claim, whether or not you actually claimed it. The IRS uses the phrase “allowed or allowable.” Skipping the deduction on prior returns doesn’t shield you from recapture at sale. If you held a rental for nine months and were entitled to depreciate it, the IRS treats you as though you did.
Flipping Regularly? Watch for Dealer Status
Repeat flipping can lead the IRS to classify you as a real estate dealer rather than an investor. Dealers hold property primarily for sale to customers in the ordinary course of business, and the label carries a real cost: profits become self-employment income, not capital gains. That triggers the 15.3% self-employment tax on top of ordinary income tax — 12.4% for Social Security and 2.9% for Medicare.
The Social Security portion applies to the first $184,500 of net self-employment income in 2026.8Social Security Administration. Contribution and Benefit Base Medicare has no cap, and an extra 0.9% Medicare tax applies above $200,000 for singles or $250,000 for joint filers.
There’s no bright-line test. Courts weigh how often you sell, how long you hold each property, whether you improved before reselling, how much you advertised, and whether real estate is your main income. Someone flipping three houses in a year looks far more like a dealer than someone selling a single investment property. The classification is made after the fact from your pattern of activity, so by the time the IRS reaches a conclusion, the tax consequences are already set. If flipping is a routine part of your income, this is worth reviewing with a tax advisor.
Offsetting the Gain With Capital Losses
Capital losses from other investments — a stock sold at a loss, another property sold below basis — reduce your gain dollar for dollar. Short-term losses offset short-term gains first, then any leftover losses can offset long-term gains.
When total losses exceed total gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Losses beyond that carry forward indefinitely to future years. The carryforward doesn’t populate automatically in tax software; you enter it each year using the Capital Loss Carryover Worksheet in the Schedule D instructions.
Tax-loss harvesting becomes concrete here. If you’re holding losing investments at year-end and just booked a large short-term property gain, selling those losers before December 31 lowers your bill directly. A $30,000 loss offsets $30,000 of gain that would otherwise be taxed at your marginal rate.
Primary Residence Exception
If the property was your home, the Section 121 exclusion normally shields up to $250,000 of gain ($500,000 for joint filers), but it requires two years of ownership and use out of the previous five.3Internal Revenue Service. Publication 523 – Selling Your Home A short-term sale won’t meet that. A partial exclusion may still apply if you sold because of a qualifying work move, health reason, or unforeseeable event, prorated by the months you owned and lived in the home. This does not help with a pure investment property or a flip.
Paying and Reporting the Tax
The IRS expects taxes as you earn. If the sale creates a gain large enough that you’ll owe more than $1,000 above what withholding covers, quarterly estimated payments are generally required.9Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax Skipping them triggers an underpayment penalty at the IRS’s current interest rate.
The 2026 estimated payment deadlines:
- January through March income: April 15, 2026
- April through May income: June 15, 2026
- June through August income: September 15, 2026
- September through December income: January 15, 2027
Estimated payments go in on Form 1040-ES. A sale that closes in July means the first estimated payment for that gain is due September 15. You avoid the penalty entirely if withholding plus estimated payments cover at least 90% of the current year’s tax or 100% of last year’s, whichever is less. For W-2 employees, raising withholding at work for the rest of the year is often simpler, and the IRS treats withholding as paid evenly across the year, which sidesteps quarterly timing issues.
Report the sale on Form 8949, listing the purchase date, sale date, sale price, and adjusted basis.10Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets Totals flow to Schedule D of Form 1040, which computes your net capital gain or loss. The title company or closing attorney will usually send a Form 1099-S showing gross proceeds. The IRS receives a copy, so mismatches with your records generate automated notices. If your selling costs and basis adjustments aren’t reflected on the 1099-S — usually they aren’t — report the full gross proceeds on Form 8949 and show the adjustments in the appropriate columns.