The capital gains tax rate on property depends on how long you owned it and how much you earn. Hold the property for more than one year and your profit qualifies for long-term rates of 0%, 15%, or 20%. Sell within a year and the profit is taxed as ordinary income at rates from 10% up to 37%. For 2026, a single filer pays 0% on long-term gains if taxable income stays below $49,450, and married couples filing jointly pay 0% up to $98,900. High earners can also owe an extra 3.8% surtax, and rental owners face depreciation recapture at up to 25%.
The One-Year Line
The IRS sorts capital gains into two buckets based on how long you held the property before selling. One year or less is short-term. More than one year is long-term.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 close the sale.
The gap between the two treatments is huge. A property flipped in ten months might face a 37% federal rate, while the same profit on a property held for 13 months could be taxed at 15% or even 0%. Keep your purchase date and closing date on file. It’s the simplest thing you can do to protect the rate you qualify for.
Long-Term Capital Gains Rates for 2026
Property held longer than one year gets preferential rates that sit well below ordinary income rates.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses Three tiers apply for 2026, based on your total taxable income:3Internal Revenue Service. Rev. Proc. 2025-32
- 0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% rate: taxable income from $49,451 to $545,500 (single), $98,901 to $613,700 (married filing jointly), or $66,201 to $579,600 (head of household).
- 20% rate: taxable income above those 15% ceilings.
One detail catches sellers off guard: the rate is based on your total taxable income, not just the gain. If you earn $400,000 in wages and sell property for a $100,000 long-term gain, the combined figure determines which bracket the gain falls into. A large gain can push part of itself into the next tier.
Short-Term Capital Gains Rates for 2026
Profits from property held for one year or less are taxed as ordinary income. The gain gets stacked on your wages, interest, and other earnings, and the combined total determines your bracket. The seven federal brackets for 2026:3Internal Revenue Service. Rev. Proc. 2025-32
- 10%: up to $12,400 (single) or $24,800 (married filing jointly)
- 12%: $12,401–$50,400 (single) or $24,801–$100,800 (married filing jointly)
- 22%: $50,401–$105,700 (single) or $100,801–$211,400 (married filing jointly)
- 24%: $105,701–$201,775 (single) or $211,401–$403,550 (married filing jointly)
- 32%: $201,776–$256,225 (single) or $403,551–$512,450 (married filing jointly)
- 35%: $256,226–$640,600 (single) or $512,451–$768,700 (married filing jointly)
- 37%: over $640,600 (single) or over $768,700 (married filing jointly)
The practical takeaway: a high earner who flips a house within a year can lose more than a third of the profit to federal tax alone. Holding one extra month past the anniversary can drop the rate to 15% or 20%.
Selling Your Main Home
Most homeowners selling a primary residence owe no capital gains tax at all. Under Section 121 of the Internal Revenue Code, you can exclude up to $250,000 in gain if you’re a single filer, or up to $500,000 if you’re married filing jointly.4Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain from Sale of Principal Residence
To claim the full exclusion, you need to pass two tests. You must have owned the home for at least two of the five years before the sale, and you must have used it as your principal residence for at least two of those same five years. The two-year periods don’t need to be consecutive, and the ownership and use years don’t need to line up.5Internal Revenue Service. Topic No. 701, Sale of Your Home You also can’t have claimed the exclusion on another home sale within the prior two years.
If you fall short of the two-year requirement, you may still qualify for a partial exclusion when the sale was driven by a job relocation at least 50 miles farther from the home, a health-related move, or unforeseen circumstances such as divorce, job loss, or natural disaster. The partial amount is prorated based on the fraction of the two years you actually met.6Internal Revenue Service. Publication 523, Selling Your Home
What Actually Gets Taxed: Your Adjusted Basis
Your taxable gain is not simply sale price minus purchase price. What gets taxed is the sale price minus your adjusted basis, which reflects costs you’ve added to the property over time.7Internal Revenue Service. Property (Basis, Sale of Home, etc.) 3 A higher basis means a smaller taxable gain.
Basis starts with what you paid, including closing costs at purchase. Capital improvements then increase it. The IRS draws a firm line between improvements and ordinary repairs. Improvements add value, extend the property’s useful life, or adapt it to a new use: a new roof, a room addition, central air, a paved driveway, rewiring.8Internal Revenue Service. Publication 551, Basis of Assets Fixing a leaky faucet or patching drywall does not.
Some items reduce basis. Depreciation claimed on a rental or business property lowers it. Insurance reimbursements for casualty losses and certain tax credits also reduce it.9Internal Revenue Service. Topic No. 703, Basis of Assets Keep receipts for every renovation. The difference between a well-documented basis and a sloppy one is often five figures in tax.
Inherited Property Gets a Stepped-Up Basis
Property you inherit carries a significant advantage. Instead of taking over the prior owner’s purchase price, you receive a stepped-up basis equal to the property’s fair market value on the date the prior owner died.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent All the appreciation during the deceased owner’s lifetime effectively disappears.
Say a parent bought a house for $80,000 in 1985 and it was worth $450,000 at their death. Your basis is $450,000. Sell it for $470,000 and your taxable gain is $20,000. Without the step-up, you would owe tax on $390,000. The rule applies whether you inherit through a will, a living trust, or joint tenancy with right of survivorship.
Property received as a gift during the owner’s lifetime does not get this treatment. You take over the original owner’s basis, which can produce a much larger taxable gain when you sell.
The 3.8% Net Investment Income Tax
Higher earners face an added 3.8% surtax on top of the 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).11Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax The tax is applied to the lesser of your net investment income or the amount by which your income exceeds the threshold.12Internal Revenue Service. 13Internal Revenue Service. 26 CFR Part 1 – Capital Gains, Installment Sales, Unrecaptured Section 1250 Gain This is unrecaptured Section 1250 gain.
Depreciation gave you yearly deductions that reduced ordinary income. When you sell, the IRS recaptures those savings by taxing that slice of gain at up to 25% instead of the lower 15% or 20% rate. Profit above the depreciated amount qualifies for regular long-term rates. For an owner who claimed $60,000 in depreciation over a decade, $60,000 of the sale profit is taxed at up to 25%, and the rest at 15% or 20%.
Many rental sellers are caught off guard because they don’t realize depreciation was quietly lowering their basis year after year. Even if you didn’t actually claim it, the IRS can treat you as though you did if you were entitled to take it. Pull your accumulated depreciation figure before listing the property.
Deferring Gains With a 1031 Exchange
Investors who want to defer the tax entirely can use a Section 1031 exchange, rolling proceeds from one investment property into another without recognizing a gain. The replacement must be real estate held for business or investment use, and the exchange must follow strict deadlines.14Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Personal residences do not qualify. Property held primarily for resale does not qualify either.
Two deadlines govern the process. You have 45 calendar days from the closing on your sold property to identify potential replacement properties in writing. You then have 180 calendar days from that same closing date to complete the purchase. Both include weekends and holidays, and missing either disqualifies the exchange entirely.
One more critical rule: you cannot touch the sale proceeds. A qualified intermediary must hold the funds and release them only to purchase the replacement. If the money passes through your hands or your agent’s at any point, the IRS treats it as a taxable sale. U.S. and foreign real property are not considered like-kind to each other, so a domestic rental cannot be exchanged for an overseas one.
State Taxes Stack on Top
Federal rates are only part of the bill. Most states tax capital gains as ordinary income, so your state rate lands on top of the federal rate. About nine states impose no income tax, meaning residents owe nothing at the state level on property gains. At the other end, a handful of states push the combined federal-and-state rate on long-term gains above 35% for high earners. Check your state’s treatment before estimating what you’ll owe.
Reporting the Sale and Paying the Tax
Every taxable property sale must be reported on your federal return, even if you owe nothing after applying the Section 121 exclusion. The closing agent or title company will usually issue a Form 1099-S documenting the proceeds. You list each transaction on Form 8949, including the acquisition date, sale date, sale price, and adjusted basis.15Internal Revenue Service. Instructions for Form 8949 Totals flow onto Schedule D of your Form 1040, which calculates the tax.
If your gain is large and withholding from other income won’t cover the tax, you may need to make an estimated tax payment to avoid an underpayment penalty. Estimated payments for 2026 are due April 15, June 15, and September 15 of 2026, and January 15 of 2027. Sellers who close midyear should calculate the expected tax and pay by the next quarterly deadline rather than waiting until the following spring.