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Capital gains tax on selling a rental property: the real number, and five ways out

Depreciation recapture is the tax landlords forget until the closing statement. Here is what a typical 20-year rental costs to sell, and what each of the deferral strategies does and does not fix.

Free education from the Retirement Literacy Foundation, a 501(c)(3). Start with the free one-page Big Sale Tax Worksheet below and run your own numbers.

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Depreciation, refinances and a prior 1031 all shrink your basis. This one-page worksheet walks you through your adjusted basis, gain, the 25% recapture slice and whether your cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. Email only; unsubscribe any time.

The number

What selling a rental actually costs in tax

A rental bought for $400,000 twenty years ago, depreciated $250,000, sold for $1,200,000 by a married couple in California in 2026:

LayerRateAmount
Depreciation recapture (unrecaptured Section 1250 gain)up to 25% federal$250,000 x 25% = about $62,000
Long-term capital gain on the rest ($800,000 minus selling costs)15% / 20%about $140,000
Net investment income tax3.8% on the whole gain above $250,000 MAGIabout $40,000
California9.3% to 12.3% on the whole gain, recapture includedabout $105,000
Totalabout $347,000, or 43% of the gain

Every option below changes at least one of those four lines. None of them changes the recapture line except a 1031 exchange and holding until death.

The options, honestly

Five exits for a landlord

  1. 1031 exchange. Buy equal-or-greater investment property within 180 days, identify within 45, use a qualified intermediary. Defers everything including recapture. You are still a landlord. California will track the exchange if the new property is out of state.
  2. Delaware Statutory Trust. A 1031 into a passive fractional interest in a large property (an apartment complex, a distribution center, a medical office). Same deferral, no management, but 5 to 10 years of illiquidity and sponsor fees of 8% to 12% up front. Read the private placement memorandum, not the brochure.
  3. Section 453 installment sale. Sell outright and take the price over time, either as a seller-financed note or as a structured installment sale where the buyer pays cash at closing and a life insurer pays you on the schedule you chose. Spreads the capital gain (and often keeps each year under the 3.8% and 20% thresholds); recapture is still taxed in year one. You are done being a landlord.
  4. Charitable remainder trust. Deed the property to the trust before the sale; the trust sells tax-free, pays you 5% or more for life, and you get a deduction now. Irrevocable, and the remainder goes to charity. For sellers who would give anyway.
  5. Sell and pay, in the right year. Retire first, sell in January, harvest losses, split the sale across two tax years if the buyer will close in two pieces. Sometimes the cheapest option once fees and lock-ups are counted.
Former primary residence? If you lived in it 2 of the last 5 years, the Section 121 exclusion ($250,000 single / $500,000 married) still applies to the gain, but not to the depreciation taken after May 1997. You can combine 121 with a 1031 on the same sale. Land or farmland? No depreciation, so no recapture, and installment sales are the traditional tool; special-use valuation and the step-up at death matter more than any exchange.
Free · one page · fill in your own numbers

Run your own numbers before you decide.

Depreciation, refinances and a prior 1031 all shrink your basis. This one-page worksheet walks you through your adjusted basis, gain, the 25% recapture slice and whether your cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. Email only; unsubscribe any time.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Figures are 2026 federal amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 21, 2026.

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