Rental Property Capital Gains Calculator
Selling a rental property triggers capital gains tax on the profit, plus depreciation recapture tax on every dollar of depreciation you claimed during ownership. Understanding the full tax cost before you sell is essential — in some cases, a 1031 exchange or installment sale changes the math dramatically.
This page explains how each component is calculated, using the property in the calculator above as a worked example.
How it's calculated
The taxable gain on a rental property sale is calculated in two layers, each taxed at a different rate.
Layer 1 — Depreciation recapture: All accumulated depreciation deductions taken during ownership are recaptured and taxed at a flat 25% federal rate under IRS Section 1250 (Unrecaptured Section 1250 Gain). This applies regardless of how long you held the property.
Layer 2 — Long-term capital gain: The remaining profit above the adjusted basis (after removing recaptured depreciation) is taxed at the long-term capital gains rate if you held the property for more than one year. For 2024, long-term CG rates are 0% (taxable income under ~$47,025 single / ~$94,050 married), 15% (most filers), or 20% (income above ~$518,900 single / ~$583,750 married), per IRS Publication 544.
Formula: Adjusted basis = Original purchase price + capital improvements − accumulated depreciation. Gain = Sale price − selling costs − adjusted basis. Depreciation recapture = accumulated depreciation × 25%. Remaining long-term gain = (gain − accumulated depreciation) × long-term CG rate.
The non-obvious fact that catches investors off guard: depreciation recapture is unavoidable even if you never claimed the depreciation deduction. The IRS taxes depreciation that was 'allowed or allowable.' If you failed to claim it during ownership, you paid more tax than necessary each year and will still owe recapture at sale. A 1031 exchange defers all of this — both the capital gain and the depreciation recapture — into the replacement property.
A worked example
A property purchased for $250,000 (with $7,500 in closing costs) is sold for $380,000 after 10 years. Selling costs are $22,800 (6% commission).
The depreciable basis was $206,000 (82% of total cost basis of $257,500). Annual depreciation was $7,491 ($206,000 ÷ 27.5), and 10 years of deductions total $74,909.
Adjusted basis at sale: $257,500 − $74,909 = $182,591. Net sale proceeds: $380,000 − $22,800 = $357,200.
Total gain: $357,200 − $182,591 = $174,609. Of that, $74,909 is depreciation recapture taxed at 25% = $18,727.
The remaining $99,700 is long-term capital gain taxed at 15% = $14,955. Total federal tax: $33,682 on a $174,609 gain — about 19.3% effective rate.
Without a 1031 exchange, the investor nets $357,200 − $33,682 = approximately $323,500 after federal tax.
Common mistakes to avoid
- Forgetting that depreciation recapture is taxed at 25%, not at the long-term capital gains rate. Many investors plan for 15% on all of their gain and are surprised by the higher rate on the recaptured amount.
- Assuming you can avoid depreciation recapture by not claiming depreciation. The IRS taxes recapture on amounts 'allowed or allowable,' so even if you skipped the deduction during ownership, you owe the 25% recapture tax at sale.
- Leaving out selling costs from the gain calculation. Real estate commissions (typically 5–6%), title insurance, and closing costs reduce your net proceeds and therefore reduce the taxable gain. These are legitimate deductions from the sale price.
- Treating a 1031 exchange as tax elimination. A 1031 exchange defers capital gains and depreciation recapture into the replacement property — it does not eliminate them permanently unless you hold until death (when a step-up in basis may apply to heirs).
- Not accounting for state capital gains taxes. Many states impose their own capital gains tax on top of federal rates. California, for example, taxes capital gains as ordinary income at rates up to 13.3%.
Frequently asked questions
What is the capital gains tax on a rental property sale?
Selling a rental property triggers two types of federal tax. First, accumulated depreciation is recaptured at a flat 25% rate (IRS Unrecaptured Section 1250 Gain). Second, the remaining profit is taxed at the long-term capital gains rate — 0%, 15%, or 20% depending on your income. Most sellers pay 15% on the non-recapture portion, for a blended effective rate around 18–22%.
What is depreciation recapture and how is it taxed?
Depreciation recapture is the IRS mechanism for recovering the tax benefit of depreciation deductions when you sell the property. All accumulated depreciation is taxed at a flat 25% federal rate under Section 1250 — higher than the standard 15% long-term capital gains rate most sellers pay on the remaining gain.
Can I avoid depreciation recapture tax?
You cannot eliminate depreciation recapture, but you can defer it with a 1031 like-kind exchange. A qualifying 1031 exchange rolls your gain and accumulated depreciation into the replacement property, deferring all taxes until you eventually sell without exchanging. If you hold replacement property until death, heirs may receive a stepped-up basis, potentially eliminating deferred gains.
What is the adjusted basis of a rental property?
Adjusted basis equals your original purchase price plus closing costs and capital improvements, minus accumulated depreciation deducted over your ownership period. The lower your adjusted basis, the higher your taxable gain at sale. Depreciation reduces basis each year, which is why long-held properties often trigger larger gains.
How do selling costs reduce my capital gains tax?
Selling costs — real estate commissions, title fees, attorney fees, and other closing costs — reduce your net sale proceeds and therefore reduce your taxable gain. On a $380,000 sale with 6% in selling costs, $22,800 is subtracted before calculating the gain. Always include selling costs in your net proceeds estimate.