Capital Gains Tax on Investment Property: 2026 Rates

Capital gains tax on investment property is the federal (and usually state) tax you owe on the profit when you sell real estate held for investment. If you owned it for more than one year, the profit is generally a long-term capital gain taxed at 0%, 15%, or 20% depending on your taxable income, except that the part of the gain created by depreciation on a rental is taxed at up to 25%, and higher earners may owe an extra 3.8% net investment income tax.

If you held the property for a year or less, or you are in the business of flipping or wholesaling, the profit is usually ordinary income instead. That distinction, more than any rate table, decides what most beginning investors actually pay. This guide walks through the 2026 brackets, how gain is calculated, a full worked rental sale, where flippers and wholesalers fit, and the legal ways investors reduce or delay the bill.

The 2026 long-term capital gains brackets

Long-term rates are tied to taxable income, not to the size of the gain alone. The IRS adjusts the thresholds for inflation each year. For tax year 2026, the brackets reported by NerdWallet from the IRS inflation adjustments in Revenue Procedure 2025-32 are:

Rate	Single filers, 2026 taxable income	Married filing jointly, 2026 taxable income
0%	Up to $49,450	Up to $98,900
15%	$49,451 to $545,500	$98,901 to $613,700
20%	Over $545,500	Over $613,700

The gain itself is stacked on top of your other income, so a large sale can push part of the gain into a higher bracket. Check the current-year figures before you plan a sale, because the thresholds move every year.

Two other federal rates apply to real estate specifically. According to IRS Topic 409, the portion of gain that represents “unrecaptured section 1250 gain,” meaning the depreciation you claimed on a building, is taxed at a maximum of 25%. And IRS Topic 559 explains the 3.8% net investment income tax, which applies to investment gains and rents once modified adjusted gross income exceeds $200,000 for single or head of household filers, or $250,000 for married couples filing jointly.

Short-term versus long-term: the one-year line

The IRS treats property held for more than one year as long-term. Hold it for one year or less and the gain is short-term, taxed at your ordinary income rates, which run as high as 37% federally. On a $60,000 profit, the difference between a 15% long-term rate and a 32% ordinary rate is more than $10,000.

The holding period generally starts the day after you acquire the property and includes the day you sell. Investors close to the line sometimes push a closing date by a few weeks to cross it. That can be worth real money, but only if the market and your carrying costs allow it.

How to calculate your gain

Gain is not sale price minus purchase price. It is the amount realized minus your adjusted basis.

Start with your cost basis. Purchase price plus most closing costs you paid to buy, such as title insurance, recording fees, and transfer taxes paid by the buyer.
Add capital improvements. A new roof, an addition, or a full kitchen remodel increases basis. Routine repairs do not.
Subtract depreciation. For a rental, subtract all depreciation you claimed or were entitled to claim. Residential rental buildings are generally depreciated over 27.5 years; land is never depreciated.
Figure the amount realized. Sale price minus selling expenses such as commissions, seller-paid closing costs, and transfer taxes paid by the seller.
Subtract. Amount realized minus adjusted basis equals your gain or loss.

The depreciation step catches many new landlords off guard. You reduce basis by depreciation “allowed or allowable,” so skipping depreciation on your returns does not protect you from the tax on it later. Our guide to depreciation recapture explains that rule in more detail.

Worked example: selling a rental after six years

Every figure below is hypothetical and rounded. The depreciation is simplified (it ignores the mid-month convention), and state tax is left out because it varies so much.

A married couple buys a single-family rental for $250,000, including closing costs. The county assessor’s land-to-building ratio supports allocating $50,000 to land and $200,000 to the building. They hold it six full years, claiming about $7,273 a year in depreciation ($200,000 divided by 27.5), for roughly $43,636 in total. They then sell for $340,000 and pay $20,000 in commissions and closing costs.

Line	Amount
Original cost basis	$250,000
Less depreciation claimed	-$43,636
Adjusted basis	$206,364
Sale price	$340,000
Less selling costs	-$20,000
Amount realized	$320,000
Total gain	$113,636
Unrecaptured section 1250 portion (depreciation)	$43,636, taxed at up to 25%
Remaining long-term capital gain	$70,000

Assume their other taxable income is $100,000 (about $132,000 of adjusted gross income before the sale), so none of the gain falls in the 0% bracket and all of the regular long-term gain lands in the 15% bracket. The federal tax works out roughly as follows:

Unrecaptured section 1250 gain: taxed at their ordinary rate, capped at 25%. Their ordinary bracket here is 22%, so about $9,600 on $43,636.
Remaining gain: 15% of $70,000, or $10,500.
Net investment income tax: their modified AGI rises to roughly $246,000 with the sale, just below the $250,000 joint threshold, so no NIIT in this scenario.

That puts the federal bill in the neighborhood of $20,100 on $113,636 of gain, an effective rate near 18%. In a higher bracket, the depreciation portion would hit the full 25% cap. If the same couple had $200,000 of other income, part of the gain would also face the 3.8% NIIT. If they lived in a state with an income tax, they would add that too. The exact numbers come from Form 8949, Schedule D, and Form 4797, which is why most investors have a tax professional prepare the year-of-sale return.

Flippers and wholesalers: why capital gains rates may not apply

Long-term capital gains rates are for property held as an investment. Property held primarily for sale to customers in the ordinary course of business is inventory, and profit on inventory is ordinary income. Courts and the IRS look at facts such as how often you buy and sell, how long you hold, how much you improve and market the property, and whether real estate is your main source of income.

Wholesalers. Assignment fees are generally treated as ordinary business income, and an active wholesaler will usually owe self-employment tax on the net profit as well. Our guide to wholesale real estate taxes covers 1099s, quarterly estimates, and entity choices.
Flippers. Most flips are held under a year, so the gain would be short-term anyway. Investors who flip regularly are often classified as dealers, which adds self-employment tax and rules out tools like a 1031 exchange on those properties. Our guide on how to flip a house walks through flip budgets that account for this.
Buy-and-hold investors. Rentals held long term are the classic capital gains case, with the depreciation wrinkle described above.

Same $50,000 profit, three tax outcomes

To see why classification matters, take a hypothetical $50,000 profit and run it three ways for a single investor whose other income places them in the 24% ordinary bracket and the 15% long-term bracket. Figures are rounded and ignore state tax, deductions, and NIIT.

How the profit is earned	Tax character	Approximate federal tax
Land held three years as an investment, then sold	Long-term capital gain at 15%	About $7,500
House flipped after eight months	Short-term gain at the 24% ordinary rate	About $12,000
Assignment fees from wholesaling as a business	Ordinary income plus self-employment tax	About $12,000 of income tax plus roughly $7,000 of self-employment tax, before the deduction for half of it

Self-employment tax is 15.3% of most net self-employment earnings, with the Social Security portion capped each year, and half of it is deductible when you figure income tax. The point of the table is not the exact dollars; it is that the same profit can cost roughly twice as much depending on how and how long you held the property. That is why investors plan the exit before they buy, and why the strategy you choose shapes your after-tax return as much as the purchase price does.

Many investors do more than one of these. Keeping rentals and flips in separate entities or at least separate books makes it easier to show which properties are investments and which are inventory. Where the line falls on your own deals is a question to work through with a CPA who knows real estate.

Legal ways to reduce or defer capital gains tax on investment property

None of these is a loophole; each is written into the tax code with conditions attached. The right choice depends on what you plan to do next with the money.

1031 like-kind exchange

Selling investment real estate and buying other investment real estate through a qualified intermediary can defer both the capital gain and the depreciation recapture. Strict 45-day identification and 180-day closing deadlines apply. Our 1031 exchange rules guide covers the mechanics. The deferral is just that: if you later sell without exchanging, the deferred gain comes due.

Hold past one year

The simplest move. If a property is a long-term hold rather than a flip, crossing the one-year mark changes the rate table you use.

Time the sale to your income

Because brackets depend on total taxable income, selling in a year when your other income is low, such as after leaving a job or in early retirement, can drop part or all of the long-term gain into the 0% or 15% bracket.

Installment sale

When you carry financing for the buyer, you generally report gain as you receive principal payments rather than all in the year of sale, which can keep you in a lower bracket. Seller financing has its own risks, covered in our seller financing guide. The IRS explains the reporting rules in Publication 537.

Harvest capital losses

Capital losses from other investments offset capital gains. If losses exceed gains, IRS Topic 409 allows up to $3,000 ($1,500 if married filing separately) to offset ordinary income each year, with the rest carried forward.

Move in, carefully

The home sale exclusion lets owners exclude up to $250,000 of gain, or $500,000 for joint filers, if they owned and lived in the home as their main residence for at least two of the five years before the sale. Converting a rental into a residence does not get the full benefit, though. IRS Publication 523 explains that gain allocable to periods of “nonqualified use” after 2008 is not excludable, and depreciation claimed after May 6, 1997 cannot be excluded either.

Hold until death

Heirs who inherit property generally receive a basis equal to fair market value at the date of death, which can erase the built-in gain. This is an estate planning strategy rather than an exit strategy, and it is one reason long-held family rentals are common in probate files.

State capital gains taxes

Most states with an income tax treat capital gains as ordinary income at the state level, so the state rate applies on top of the federal one. A handful of states have no broad personal income tax. Some states also withhold tax at closing when a nonresident sells property there. If you invest out of state, ask the title or escrow company early whether nonresident withholding applies, because it affects the cash you receive at closing even if you get some of it back when you file.

Mistakes that raise your tax bill

Not tracking basis. Lost receipts for a new roof or HVAC system mean a smaller basis and a bigger gain. Keep a folder for every property from day one.
Skipping depreciation. You pay tax on depreciation you were entitled to whether or not you claimed it, so failing to claim it simply loses the deduction.
Forgetting NIIT. A big sale year can push income over the threshold even if you are normally well below it.
Spending the proceeds. If you are not exchanging, set aside an estimate of the tax right away. Underpayment penalties can apply if you do not make estimated payments.
Starting a 1031 too late. Once you receive the sale proceeds, the exchange is generally off the table. The intermediary must be in place before closing.

When deferring the tax is the wrong move

Tax deferral is not free. A 1031 exchange can push you to overpay for a replacement property just to beat the 45-day clock, and the deferred gain plus recapture keeps building. If you want out of real estate, need the cash for a different opportunity, or the replacement deals in your market are poor, paying the tax and moving on can be the better financial decision. Run both scenarios. Likewise, cost segregation and accelerated depreciation lower taxes now but increase the 25% recapture later, so they suit investors who plan to hold or exchange, not those planning a near-term sale. Our cost segregation guide covers that trade-off.

Capital gains FAQ for investors

Do I pay capital gains tax on a property I wholesaled?

Usually not at capital gains rates. Assignment fees are generally ordinary business income, and you may owe self-employment tax on the net profit.

Is depreciation recapture the same as capital gains tax?

They are reported together but taxed differently. The depreciation portion of a rental’s gain is taxed at up to 25%; the rest is taxed at the regular long-term rates.

Can I avoid capital gains tax by reinvesting the money?

Only through a properly structured 1031 exchange or another specific provision. Simply buying another property with the proceeds does not defer the tax.

Do I owe capital gains tax if I sell at a loss?

No. A loss on investment property can offset other gains, and excess loss is limited to $3,000 a year against ordinary income with the remainder carried forward. Losses on a personal residence are not deductible.

Which forms report the sale of a rental property?

The sale of a rental is generally reported on Form 4797 because the building was used in a trade or business activity, with the results flowing to Schedule D. A sale of land held purely as an investment usually goes on Form 8949 and Schedule D. The closing agent typically issues a Form 1099-S reporting the gross proceeds, and the IRS will expect to see that sale on your return.

Tax and exit strategy guides

Depreciation recaptureThe 25% piece 1031 exchangeDefer the gain Wholesaler taxesOrdinary income REPSLoss rules Cost segregationFaster depreciation Cash-on-cashFree calculator All 50 statesDirectory

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