Tax Implications of Selling a Rental Property

Selling a Rental: The Tax Picture

Selling a rental property triggers different tax treatment than selling a primary residence. Disclaimer: this is general information, not tax advice. Always consult a CPA.

Capital Gains Tax

Your gain is the sale price minus your adjusted basis (purchase price + improvements - depreciation taken). For properties held over one year, long-term capital gains rates apply (0%, 15%, or 20% depending on income).

Depreciation Recapture (Section 1250)

Any depreciation you claimed (or could have claimed) while the property was a rental is "recaptured" at sale and taxed at a maximum rate of 25%. This catches many landlords off guard — depreciation is a benefit while you own, but the IRS gets its share back when you sell.

1031 Exchange — Defer Your Taxes

A 1031 exchange lets you defer capital gains and depreciation recapture by reinvesting sale proceeds into a like-kind replacement property. Strict rules apply: you must identify replacement properties within 45 days and close within 180 days. A qualified intermediary must handle the proceeds — you can't touch the money. If you're exiting the rental business entirely, a 1031 exchange isn't applicable — but selling for cash and paying the taxes may still be the right move financially.