Selling a Rental Property: The Tax Bill Nobody Expects
Selling a rental property is not like selling a stock. Years of depreciation deductions come back as a flat 25% recapture tax, the remaining gain is taxed at capital gains rates, and high earners add the 3.8% Net Investment Income Tax. On a typical sale the combined bill surprises most owners. Here is the breakdown and the legal way to avoid it.
The three layers of tax
| Layer | Rate | Applies to |
|---|---|---|
| Depreciation recapture | 25% | All depreciation you claimed (the 27.5-year building portion) |
| Long-term capital gains | 0 / 15 / 20% | The gain above the recaptured amount |
| Net Investment Income Tax | 3.8% | Gain if your income exceeds $200,000 (single) / $250,000 (joint) |
A worked example
Bought for $300,000, sold for $450,000, with $60,000 of depreciation claimed:
| Item | Amount |
|---|---|
| Total gain | $150,000 |
| Recapture tax (25% of $60,000) | $15,000 |
| Capital gains tax (15% of $90,000) | $13,500 |
| NIIT (3.8%, income above threshold) | $1,900 |
| Total federal tax | $30,400 |
That is 20% of the sale gain — before state tax. The rental sale tax calculator runs your exact numbers.
Why depreciation is taxed harder
You deducted the depreciation at your ordinary rate over the years — the 25% recapture roughly claws that benefit back. It applies first, before the capital gains rate, and it is not optional: you owe recapture even if you never actually claimed depreciation, because the IRS assumes you took it.
The 1031 exchange: the legal deferral
A like-kind exchange lets you roll the sale proceeds into a replacement property and defer all of it — recapture, gains, and NIIT — as long as you identify the replacement within 45 days and close within 180. The tax doesn’t disappear; it carries into the new property’s basis and comes due at the final sale. That is how real-estate investors defer tax indefinitely.
When the primary-home exclusion helps
If you lived in the property as your main home for 2 of the past 5 years, up to $250,000 (single) / $500,000 (joint) of gain is excluded — but only for the portion used as your home, and never for depreciation recapture. Rental years inside that window still owe recapture on the depreciation.
Run the numbers
Estimate your bill with the rental property sale tax calculator, check the property’s cash flow with the rental property calculator, and compare against selling a primary home with the home sale calculator.