Capital Gains Tax on Rental Property: How It's Figured and What Sellers Can Do

When a landlord asks “what will I owe?”, they’re usually asking three questions at once: how big is the gain, what rate applies, and can it be avoided? You can’t give the number, but you can explain how it’s figured so the client walks into the CPA’s office ready. This guide covers the mechanics and the main deferral options, including where an Opportunity Zone fund fits.

It’s part of our series for agents. The hub is OZ talking points for your next listing appointment.

Selling another kind of investment property? See capital gains tax on investment property for each property type.

Step 1: Figure the gain

Repairs aren’t improvements, and depreciation reduces basis even if the landlord never claimed it (IRC §1016(a)(2)). IRS Publication 544 and Publication 527 walk through the details.

Step 2: Split the gain into its tax parts

• Unrecaptured §1250 gain: the part equal to depreciation on the building, taxed at up to 25%.
• §1245 recapture: depreciation on appliances, carpeting or cost-segregated components, taxed as ordinary income.
• The rest: long-term capital gain at 0%, 15% or 20% if held more than a year (IRC §1(h)). Held a year or less, it’s all ordinary income.
• Net investment income tax: 3.8% on top for modified AGI above $200,000 ($250,000 married filing jointly) (IRC §1411).
• State income tax, which varies by state.

The depreciation recapture calculator splits a sale into these parts. For a worked example, see depreciation recapture for selling landlords.

Step 3: Look at the options

Keep owning real estate: 1031 exchange

A 1031 exchange into other investment or business real property defers the whole gain, including recapture, if all the net proceeds are reinvested and the debt is replaced (IRC §1031). It needs a qualified intermediary, 45 days to identify and 180 days to close.

Get out of landlording: an Opportunity Zone fund

The seller keeps the cash and invests an amount equal to the eligible gain in a qualified opportunity fund within 180 days (IRC §1400Z-2). Unrecaptured §1250 gain and the rest of the §1231 gain can be deferred; §1245 recapture can’t. For investments on or after January 1, 2027, the deferred gain is included after five years, less a 10% basis step-up (30% for a qualified rural fund), and the fund’s appreciation can be excluded after 10 years. The Opportunity Zone tax benefits guide explains each benefit, and the 180-day deadline calculator gives the last day to invest.

This is where many landlords land: they want out of tenants and repairs, but not a large tax bill in one year. The fund is a passive, illiquid investment for years, and funds that say they’re raising money are in the Opportunity Zone funds directory.

Spread it out: installment sale

Seller financing spreads the capital gain over the years payments come in (IRC §453), but ordinary-income recapture is taxed in the year of sale.

Other levers the CPA may raise

• Suspended passive losses are generally released on a full taxable sale (IRC §469(g)).
• Capital losses from other investments offset capital gains.
• Moving into the property can open part of the home sale exclusion after two years, but not for the depreciation, and rental years after 2008 can reduce it (IRC §121(b)(5) and (d)(6)).
• Holding until death resets the basis for heirs (IRC §1014). See capital gains on inherited property.

Compare the main options on the client’s numbers with the 1031 vs DST vs Opportunity Zone calculator.

What to bring up at the listing appointment

• Ask for the closing statement from the purchase and a list of major improvements.
• Ask who prepares their taxes, and suggest a call before pricing, not after an offer.
• Ask what they want next: another rental (1031), out of real estate (an Opportunity Zone fund, or pay the tax), or income (an installment sale).
• Mention timing. Both a 1031 and an Opportunity Zone investment run on clocks that start at closing; see the 180-day clock for sellers.

Related reading

• How to avoid capital gains tax on real estate: where OZs fit
• Opportunity Zones after selling real estate
• OZ talking points for agents (series hub)

Sources: IRS Publication 544; IRS Publication 527; IRC §1; IRC §1016; IRC §1411; IRC §1031; IRC §1400Z-2; IRC §453; IRC §469; IRC §121; IRC §1014.

Not tax advice.