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Capital gains tax on selling a rental property: the real number, and five ways out

Depreciation recapture is the tax landlords forget until the closing statement. Here is what a typical 20-year rental costs to sell, and what each of the deferral strategies does and does not fix.

By , founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.

Short answerSelling a rental can stack four taxes: depreciation recapture at up to 25%, long-term capital gain at 15% or 20%, the 3.8% net investment income tax, and state tax. In this page's 2026 example, a California couple selling a $1,200,000 rental with $250,000 of depreciation owes about $301,500, or 29% of the $1,050,000 gain (IRS Rev. Proc. 2025-32; FTB 2026 schedules; last reviewed October 10, 2026).

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Depreciation, refinances and a prior 1031 all shrink your basis. This one-page worksheet walks you through your adjusted basis, gain, the 25% recapture slice and whether your cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.

The number

What does selling a rental actually cost in tax?

A rental bought for $400,000 twenty years ago, depreciated $250,000, sold for $1,200,000 by a married couple in California in 2026:

LayerRateAmount
Depreciation recapture (unrecaptured Section 1250 gain)ordinary rates, capped at 25%about $37,500 with no other income; up to $62,500 ($250,000 x 25%) when other income fills the lower brackets
Long-term capital gain on the rest ($800,000)15% / 20%about $140,200
Net investment income tax3.8% of income over $250,000about $30,400
California1% to 12.3%, plus 1% on income over $1 million, on the whole gain, recapture includedabout $93,400
Totalabout $301,500, or about 29% of the $1,050,000 gain

Rounded, illustrative, assumes no other income and no selling costs in the year of sale. Federal: 2026 brackets and $32,200 standard deduction (IRS Rev. Proc. 2025-32); California: 2026 FTB rate schedules (FTB Tax News, October 2026). See Sources and review at the bottom of the page.

Every option below changes at least one of those four lines. A 1031 exchange defers the recapture line, holding until death erases it, and an installment sale spreads it.

The options, honestly

What are five ways a landlord can reduce or defer the tax?

  1. 1031 exchange. Buy equal-or-greater investment property within 180 days, identify within 45, use a qualified intermediary. Defers everything including recapture. You are still a landlord. California will track the exchange if the new property is out of state.
  2. Delaware Statutory Trust. A 1031 into a passive fractional interest in a large property (an apartment complex, a distribution center, a medical office). Same deferral, no management, but 5 to 10 years of illiquidity and sponsor fees of 8% to 12% up front. Read the private placement memorandum, not the brochure.
  3. Section 453 installment sale. Sell outright and take the price over time, either as a seller-financed note or as a structured installment sale where the buyer pays cash at closing and a third-party funding arrangement pays you on the schedule you chose. Spreads the gain (and often keeps each year under the 3.8% and 20% thresholds). The 25% depreciation slice is spread too and is reported first as payments arrive (Treas. Reg. 1.453-12); only equipment-type (Section 1245) recapture is all taxed in year one. You are done being a landlord.
  4. Charitable remainder trust. Deed the property to the trust before the sale; the trust pays no capital gains tax when it sells, then pays you 5% or more for life (taxed as you receive it), and you get a deduction now. Irrevocable, and the remainder goes to charity. For sellers who would give anyway.
  5. Sell and pay, in the right year. Retire first, sell in January, harvest losses, split the sale across two tax years if the buyer will close in two pieces. Sometimes the cheapest option once fees and lock-ups are counted.
Former primary residence? If you lived in it 2 of the last 5 years, the Section 121 exclusion ($250,000 single / $500,000 married) still applies to the gain, but not to the depreciation taken after May 6, 1997. You can combine 121 with a 1031 on the same sale. Land or farmland? No depreciation, so no recapture, and installment sales are the traditional tool; special-use valuation and the step-up at death matter more than any exchange.
Free · one page · fill in your own numbers

Run your own numbers before you decide.

Depreciation, refinances and a prior 1031 all shrink your basis. This one-page worksheet walks you through your adjusted basis, gain, the 25% recapture slice and whether your cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.

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More free calculators for the year you sell: Rental property capital gains tax calculator · Estimated tax payment calculator · Net investment income tax calculator

Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS.