The long-term capital gains tax on real estate is charged at 0%, 15%, or 20% of your profit, depending on your total taxable income for the year. That rate applies when you owned the property for more than one year. On top of it, high earners may owe a 3.8% Net Investment Income Tax, and if you claimed depreciation on a rental, that portion of the gain is taxed separately at up to 25%. Selling your primary residence has its own carve-out that can wipe out the tax entirely for many homeowners.
The One-Year Holding Rule
The IRS draws a bright line at one year. Hold the property for more than one year before selling and your profit is a long-term capital gain, taxed at the preferential rates. Hold it for one year or less and the profit is short-term, taxed at your ordinary income rate, which can run as high as 37%.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The clock starts the day after the acquisition closing date and runs through the date you close on the sale. Rental properties, vacation homes, and personal residences all qualify as capital assets. The exception is property held as inventory by someone in the business of buying and selling real estate; those profits are taxed as ordinary business income no matter how long the property was held.
Figuring the Gain Before You Figure the Tax
The rate applies to your net gain, not the sale price. Getting to that number takes two steps.
First, calculate your adjusted basis. Start with what you paid, including settlement costs like title insurance and recording fees. Some closing charges don’t count, including fire insurance premiums, mortgage insurance premiums, lender-required appraisal fees, and pre-closing utility charges.2Internal Revenue Service. Publication 530, Tax Information for Homeowners Then adjust: capital improvements like a new roof or an addition raise the basis, while depreciation deductions, casualty loss deductions, and insurance reimbursements lower it.
Second, calculate the amount realized. That’s the sale price minus selling expenses like real estate commissions and attorney fees. Subtract adjusted basis from amount realized and you have your net gain. You report each sale on Form 8949 and carry totals to Schedule D.3Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
A worked example makes it concrete. You bought a rental for $500,000, spent $50,000 on improvements, and claimed $100,000 in depreciation over the years. Your adjusted basis is $450,000. You sell for $1,000,000 with $60,000 in selling costs, so the amount realized is $940,000 and the net gain is $490,000. That $490,000 doesn’t all get taxed at the same rate, which is where recapture comes in below.
The 2026 Rate Brackets
Which of the three long-term rates you pay depends on your total taxable income for the year, including the gain itself. For 2026, the thresholds are:4Internal Revenue Service. Revenue Procedure 2025-32
- 0% rate: taxable income up to $49,450 single or $98,900 married filing jointly.
- 15% rate: taxable income above those figures but not exceeding $545,500 single or $613,700 joint.
- 20% rate: taxable income above the 15% thresholds.
Most sellers land in the 15% bracket. The 0% rate is realistic only when your total taxable income, including the gain, stays under the threshold, which is uncommon on a significant property sale. The 20% rate catches high earners but applies only to the portion of income above the cutoff, not the entire gain.
The 3.8% Net Investment Income Tax
Higher-income taxpayers face an additional 3.8% surtax on investment income, including real estate capital gains. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 single or $250,000 joint. Those thresholds haven’t changed since the tax took effect in 2013 because they aren’t indexed for inflation.5Internal Revenue Service. Topic No. 559, Net Investment Income Tax
For a high earner in the 20% capital gains bracket, the combined federal rate on a long-term gain reaches 23.8%.
Depreciation Recapture at 25%
If you claimed depreciation deductions on a rental or investment property, the IRS reclaims the tax benefit at sale. Cumulative depreciation gets “recaptured” and taxed at a maximum federal rate of 25%, separate from the regular long-term rate. Recapture applies only to the portion of gain that equals the depreciation you claimed.6Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed
Return to the $490,000 gain from earlier. Because $100,000 of it came from depreciation deductions, that $100,000 is taxed at up to 25%, and the remaining $390,000 is taxed at the 0%, 15%, or 20% long-term rate based on income. A high-income taxpayer subject to the NIIT could face 28.8% on the recapture piece and 23.8% on the rest. This is often the part of the bill that surprises sellers, because the deductions they enjoyed for years were effectively a loan from the IRS.
The Primary Residence Exclusion
Your home is treated differently from investment property. Sell your primary residence at a profit and you can exclude up to $250,000 of the gain from income, or $500,000 for married couples filing jointly. Many homeowners pay zero federal tax on a home sale because of this.7Internal Revenue Service. Topic No. 701, Sale of Your Home
To claim the full exclusion, you must pass two tests during the five-year period ending on the sale date. The ownership test requires that you owned the home for at least two of those five years. The use test requires that you lived in it as your principal residence for at least two of those five years (24 months total, not necessarily consecutive). You can use the exclusion only once every two years. For a joint return, both spouses must meet the use test individually, and at least one must meet the ownership test.8Internal Revenue Service. Publication 523 (2025), Selling Your Home
Partial exclusions are available when a job change, health issue, or other unforeseen circumstance forces an early sale. The partial amount is the full exclusion multiplied by the fraction of the two-year requirement you actually met. A single filer selling after 12 months for a qualifying job relocation could exclude up to $125,000. Any gain above the exclusion is taxed at the applicable long-term rate.
Two important limits. First, if the property was a rental before you moved in, the portion of the gain attributable to that “nonqualified use” period doesn’t qualify for the exclusion, and any depreciation claimed during the rental years is still subject to 25% recapture regardless of the exclusion.9Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence Second, losses on the sale of a personal residence aren’t deductible at all. Loss deductions are limited to investment or business property.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Ways to Defer the Tax on Investment Property
1031 Like-Kind Exchanges
The most powerful deferral tool for investment real estate is the like-kind exchange. Rather than sell and pay tax, you exchange the property for another investment property and carry your basis forward. Tax is deferred until you eventually sell the replacement property outside an exchange.10Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
The mechanics are strict. A qualified intermediary must hold the sale proceeds; you cannot touch them. You have 45 days from the sale to identify potential replacement properties and 180 days to close on the replacement. Miss either deadline and the exchange fails, making the original sale fully taxable. Any cash, debt relief, or non-real-estate property you receive as part of the exchange is “boot” and is taxable in the year of the exchange to the extent of gain.
Installment Sales
If you finance part of the sale for the buyer, you can spread the gain over the years you receive payments instead of recognizing it all at once. The installment method is available whenever at least one payment arrives after the close of the tax year in which the sale occurs.11Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method
Each payment splits three ways: a tax-free return of basis, taxable gain, and interest income. Your gross profit percentage (total expected gain divided by total contract price) determines the gain portion of each payment. Interest is taxed separately as ordinary income.12Internal Revenue Service. Publication 537 (2025), Installment Sales The method isn’t available for dealer property, inventory, or sales at a loss, and you can elect out and report the whole gain upfront if that works better.
Qualified Opportunity Funds
Investing a capital gain into a Qualified Opportunity Fund within 180 days of the sale defers the tax on that gain. Hold the fund investment ten years and any appreciation in the fund itself is permanently excluded.13Internal Revenue Service. Opportunity Zones Frequently Asked Questions
For 2026, the practical point is a hard deadline. Deferral on the original gain ends December 31, 2026, or when you sell the fund investment, whichever is earlier. Any gain deferred through a QOF investment comes due on your 2026 return regardless of whether you’ve sold the fund position. The ten-year exclusion on fund appreciation still applies if you keep holding, but the original deferred gain will be taxed.
Don’t Forget State Taxes
Federal rates are only part of the bill. Most states tax capital gains as ordinary income, with state rates running from zero in no-income-tax states to above 13% at the high end. A handful of states offer reduced rates or partial exclusions for long-term gains, but most treat them the same as wages. Because treatment varies so much, check your state’s rules before estimating what you’ll actually net.
Some states and localities also charge real estate transfer taxes at closing, typically a fraction of a percent up to around 4% of the sale price, with most at 1% or less. These aren’t capital gains taxes, but they come out of your proceeds and are easy to miss when projecting the walk-away number.