When you sell a rental property at a gain, the part of the gain that comes from depreciation is taxed differently from the rest. The IRS calls it unrecaptured section 1250 gain, and it is taxed at your ordinary rate but never more than 25%. The rest of the gain gets the usual 0%, 15% or 20% long-term capital gain rates, and high earners may also owe the 3.8% net investment income tax.
How the calculation works
- Adjusted basis = purchase price + purchase closing costs + capital improvements − depreciation.
- Gain = sale price − selling costs − adjusted basis.
- Depreciation portion = the smaller of your total depreciation or the gain. It is stacked on top of your other taxable income and taxed at your bracket rate, capped at 25%.
- Remaining gain is taxed at 0%, 15% or 20%, depending on where it falls against the 2026 thresholds.
- NIIT of 3.8% applies to the smaller of your net investment income or the amount your modified AGI is over $200,000 (single or head of household), $250,000 (married filing jointly) or $125,000 (married filing separately).
| Filing status | 0% up to | 15% up to | 20% above |
|---|---|---|---|
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Single | $49,450 | $545,500 | $545,500 |
| Head of household | $66,200 | $579,600 | $579,600 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
Worked example
A married couple filing jointly bought a rental for $400,000 plus $8,000 of closing costs in June 2016, and later spent $30,000 on improvements. They sell in October 2026 for $650,000, with $39,000 of selling costs. Their other income is $150,000.
- Depreciation: with 20% of the purchase allocated to land, the depreciable basis is $356,400. Over 124 months at 1/27.5 per year, that is about $133,920.
- Adjusted basis: $438,000 − $133,920 = $304,080. Gain: $611,000 − $304,080 = $306,920.
- Depreciation portion: $133,920. It sits on top of $117,800 of taxable income (after the $32,200 standard deduction), so it is taxed at 22% and 24%: $30,269.
- Remaining gain of $173,000 at 15%: $25,950.
- NIIT: modified AGI of $456,920 is $206,920 over $250,000, so 3.8% × $206,920 = $7,863.
- Estimated federal tax: about $64,082.
Edge cases
- Suspended passive losses. Rental losses you couldn't deduct in past years are generally allowed in full when you dispose of your entire interest in the activity (IRS Publication 925). The calculator subtracts them from income.
- Personal property. Appliances, carpets and furniture you depreciate separately are personal property, which is generally section 1245 property. That depreciation is recaptured as ordinary income, not capped at 25%. This tool covers the building only.
- Former home. If you once lived in the property, the home sale exclusion may apply to part of the gain, but not to depreciation after May 6, 1997. See the home sale capital gains calculator.
- State tax. States tax gains differently. Enter a flat rate for a rough figure.
Next steps
To put off the tax, read 1031 exchange basics and check your timeline with the 1031 deadline calculator. To see how much depreciation you take each year, use the rental depreciation calculator. For the full picture of what you keep, try the home sale proceeds calculator.