Guide for rental owners
Selling a rental: depreciation recapture and 1031 exchanges
What you'll owe when you sell, and how a 1031 exchange can put it off.
Selling a rental can bring a big tax bill if you're not ready for it. Knowing how it's worked out lets you plan the timing, and talk through options like a 1031 exchange with your CPA well before you list.
Working out your gain
Your gain is roughly: the sale price, minus selling costs (commissions, escrow fees), minus your adjusted basis. Your adjusted basis is what you paid plus improvements, minus the depreciation you took (or could have taken). That's why good records of improvements and depreciation matter so much.
How the gain is taxed
- Depreciation recapture: the part of your gain that came from depreciation is taxed at up to 25%.
- The rest is a long-term capital gain (if you owned it over a year), taxed at 0%, 15% or 20% depending on your income.
- The 3.8% net investment income tax may apply on top, and your state taxes it too.
- Good news: any suspended passive losses you've been carrying forward are generally released when you sell.
Example
Bought for $360,000 (land $90,000), took $98,000 of depreciation, sold for $560,000 with $30,000 of selling costs → a $268,000 gain: $98,000 taxed as recapture, $170,000 as a long-term capital gain.
The 1031 exchange
A 1031 exchange lets you defer the tax by rolling the proceeds into another investment property. The key rules:
- Use a qualified intermediary: you can't touch the sale money yourself.
- Identify the replacement property within 45 days of the sale.
- Close on it within 180 days.
- To defer all of the tax, buy a property of equal or greater value and reinvest all the cash.
The tax isn't erased, just postponed, and the details matter. Plan it with your CPA before you sign a listing agreement.
Tethered Properties does this for you
Tethered Properties tracks every improvement and every year's depreciation, plus your carried-over losses, so the numbers your CPA needs at sale time are already in one place.
This guide is general information for rental owners, not tax advice. Tax rules change and every situation is different; your CPA or tax advisor knows your full picture. Figures are estimates.