Capital gains tax on real estate sold in 2026 is based on taxable gain, not the sale price or the cash left after paying the mortgage. For investment property, long-term gain may fall into the 0%, 15%, or 20% federal rate bands. Gain attributable to depreciation may be taxed at a maximum 25% rate, the 3.8% net investment income tax may apply, and one or more states may also tax the sale. A principal residence can follow different rules, including a possible Section 121 exclusion. The actual bill depends on basis, selling costs, income, holding period, depreciation, property use, and state rules.
First Identify How the Property Was Used
A real estate tax estimate can be materially wrong if it applies rental-property rules to a home sale or home-sale rules to investment property. The applicable provisions depend on how the property was used before the sale.
| Property use | Potential federal treatment | Important limitation |
|---|---|---|
| Principal residence | Section 121 may exclude up to $250,000 of gain for an eligible single filer or up to $500,000 for eligible married taxpayers filing jointly. | The ownership and use tests generally require two years of ownership and principal-residence use during the five-year period ending on the sale date. |
| Rental or investment property | Long-term or short-term gain rules apply. A qualifying Section 1031 exchange may defer recognition of gain. | Section 121 generally does not apply, and depreciation, Section 1231 netting, NIIT, and state rules can change the result. |
| Converted or mixed-use property | Sections 121 and 1031 may both be relevant to different portions or periods of ownership. | Depreciation allowed or allowable, nonqualified use, and allocations between residential and investment use require separate analysis. |
Owners who converted a residence to rental use, converted a rental into a home, or used different portions of one property for different purposes should review how Sections 121 and 1031 apply to homes and rental property. The Section 121 exclusion does not eliminate gain attributable to depreciation allowed or allowable after May 6, 1997.
How Real Estate Capital Gain Is Calculated
Start with the amount realized. This is generally the gross selling price, including liabilities assumed by the buyer, minus qualifying selling expenses such as commissions and certain closing costs. Paying off a mortgage reduces the seller’s cash proceeds, but it does not generally reduce taxable gain.
Next, calculate adjusted basis. The starting point is usually the property’s original tax basis, increased by capital improvements and certain acquisition costs, then reduced by depreciation allowed or allowable and other required adjustments. Land is not depreciable, so a purchase allocation between land and building matters.
The general formula is:
Adjusted basis = original basis plus capital improvements minus depreciation and other reductions
Total gain = amount realized minus adjusted basis
The current IRS Publication 544 explains sales of business and investment property, adjusted basis, Section 1231 netting, and the special treatment of depreciable real estate. Suspended passive losses, installment sale treatment, prior exchanges, cost segregation, casualty adjustments, and property converted from personal use can change the result.
Federal Long-Term Capital Gains Rates for 2026
Real estate held for more than one year can produce long-term capital gain. Property held for one year or less generally produces short-term gain taxed at ordinary income rates. For 2026, the long-term capital gains thresholds below apply to taxable income. Ordinary income uses the lower portions of the tax brackets first, and gain can cross more than one rate band.
| Filing status | 0% maximum taxable income | 15% maximum taxable income | 20% rate begins above |
|---|---|---|---|
| Married filing jointly or qualifying surviving spouse | $98,900 | $613,700 | $613,700 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
| Head of household | $66,200 | $579,600 | $579,600 |
| Single filer | $49,450 | $545,500 | $545,500 |
These thresholds come from IRS Revenue Procedure 2025-32. There is not a single rate applied to all gain. A seller whose taxable income crosses a threshold may have one portion of gain taxed at 15% and another portion taxed at 20%.
How Depreciation Changes the Tax
The phrase “depreciation recapture tax” is often used loosely. For most residential and commercial buildings depreciated using the straight-line method and held longer than one year, gain attributable to depreciation is generally unrecaptured Section 1250 gain. It is subject to a maximum federal rate of 25%, not an automatic flat 25% tax in every case.
Different rules can apply to components treated as Section 1245 property, including some assets identified through a cost segregation study. Those amounts may be recaptured as ordinary income. Accelerated depreciation, prior Section 1231 losses, and other facts can also change the character of the gain.
Depreciation is generally taken into account whether it was claimed or merely allowable. Skipping a depreciation deduction usually does not preserve basis. Owners should reconcile the depreciation schedule before listing the property so errors can be addressed before the return reporting the sale is prepared.
When the 3.8% Net Investment Income Tax Applies
The net investment income tax, or NIIT, is 3.8% of the lesser of net investment income or the amount by which modified adjusted gross income exceeds the applicable threshold. The individual thresholds are $200,000 for single and head of household filers, $250,000 for married couples filing jointly and qualifying surviving spouses, and $125,000 for married individuals filing separately. These statutory thresholds are not indexed for inflation.
Taxable gain from rental or investment real estate is often included in net investment income. However, the answer can differ when property is used in a nonpassive trade or business, when the taxpayer materially participates, or when special disposition rules apply. A sale can also push MAGI above the threshold even when the owner was below it in prior years.
State Tax Can Depend on Two States
The state where the real estate is located may tax gain sourced to that property. The seller’s resident state may also tax worldwide income, often with a credit mechanism intended to reduce double taxation. That means the property state matters, but it is not always the only state that matters.
States differ on tax rates, basis adjustments, depreciation, withholding, estimated payments, and conformity with Section 1031. Some states also track deferred gain after replacement property moves across state lines. A federal 1031 exchange therefore does not guarantee identical state deferral. State analysis should be completed before closing, especially when the owner and property are in different states.
Hypothetical Tax Calculation for a Rental Property
Assume an investor sells a rental property in 2026 using the following simplified facts. The property was held for more than one year, all $80,000 of depreciation is treated as unrecaptured Section 1250 gain, the remaining gain falls in the 20% long-term rate band, NIIT applies to all taxable gain, and the state taxes the federal gain at 5%. The example ignores Section 1231 netting, suspended losses, cost segregation, installment treatment, and other individual adjustments.
| Calculation item | Amount |
|---|---|
| Sale price | $700,000 |
| Qualifying selling expenses | ($42,000) |
| Amount realized | $658,000 |
| Original basis plus capital improvements | $430,000 |
| Depreciation allowed or allowable | ($80,000) |
| Adjusted basis | $350,000 |
| Total taxable gain | $308,000 |
| 20% tax on remaining $228,000 long-term gain | $45,600 |
| 25% maximum rate on $80,000 unrecaptured Section 1250 gain | $20,000 |
| 3.8% NIIT on $308,000 | $11,704 |
| Illustrative 5% state tax on $308,000 | $15,400 |
| Illustrative combined tax | $92,704 |
Under these assumptions, the estimated combined tax is about 30.1% of the $308,000 taxable gain. This is not a universal effective rate. The same property could produce a lower or higher bill for another owner because income, losses, depreciation character, state rules, and entity structure differ.
To compare a taxable sale with a possible exchange using your own assumptions, use the DST 1031 tax savings and return estimator. The calculator provides a planning illustration, not a tax return calculation, and its results should be reconciled to the seller’s depreciation schedule, ownership structure, and state rules.
How a 1031 Exchange May Defer Gain
Section 1031 may defer recognition of gain when qualifying real property held for investment or productive use in a trade or business is exchanged for other qualifying like-kind real property. The rule is deferral, not a permanent exclusion. Deferred gain generally carries into the basis of the replacement property and may become taxable in a later disposition.
A typical delayed exchange requires planning before the relinquished sale closes so the taxpayer does not receive or control the sale proceeds. Replacement property must generally be identified within 45 days and received by the earlier of 180 days after the transfer or the due date of the taxpayer’s return, including extensions. Review the site’s verified guides to qualifying like-kind real estate and the 1031 identification and closing deadlines before the sale.
Receiving cash or other nonqualifying property, taking excess debt relief, failing to reinvest sufficient proceeds, or purchasing lower-value replacement property can cause some gain to be recognized. Federal deferral also does not establish state conformity. The taxpayer, qualified intermediary, CPA, attorney, lender, and investment professional should coordinate the transaction before closing.
Using a DST as Replacement Property
A beneficial interest in a Delaware statutory trust can qualify as real property for Section 1031 when the trust is structured consistently with the conditions addressed in IRS Revenue Ruling 2004-86. Qualification is not automatic merely because an offering uses the DST label. The exchange itself must also satisfy the taxpayer, timing, identification, value, proceeds, and other applicable rules.
A DST can provide access to professionally managed replacement real estate and can reduce day-to-day landlord responsibilities. It is also a private placement investment with material risks, which can include illiquidity, limited investor control, fees, leverage, tenant or property concentration, and potential loss of principal. Tax eligibility and investment suitability are separate decisions. Investors considering this route should review how a 1031 exchange into a DST works and the site’s discussion of DST investment risks.
Planning Checklist Before a 2026 Sale
- Obtain the original closing statement, improvement records, depreciation schedules, and prior exchange documents.
- Estimate amount realized and adjusted basis without subtracting the mortgage payoff from gain.
- Separate potential long-term gain, unrecaptured Section 1250 gain, and ordinary recapture items.
- Model taxable income and NIIT for the full year of sale, not just the property transaction.
- Check the rules of both the property state and the seller’s resident state.
- If considering Section 1031, engage the qualified intermediary and professional team before the sale closes.
- Evaluate replacement property investment risks independently from the projected tax deferral.
Which Tax Forms May Apply
A real estate sale can require several federal forms because different portions of the transaction may receive different tax treatment. Form 4797 generally reports the sale of rental or business property and calculates applicable depreciation recapture. A net Section 1231 gain may ultimately flow to Schedule D, while Form 8949 may apply to capital-asset dispositions not reported elsewhere.
- Form 4797 reports many sales of rental and business property and calculates ordinary recapture items.
- Schedule D summarizes capital gains and losses, including qualifying net Section 1231 gain carried from Form 4797.
- Form 6252 reports an eligible installment sale when payments are received in more than one tax year.
- Form 8824 reports a qualifying like-kind exchange and any gain that must still be recognized.
- Form 8960 calculates the net investment income tax when it applies.
The reporting path can differ for individuals, partnerships, S corporations, trusts, and properties with mixed personal and rental use. The seller’s CPA should determine the required forms from the final closing statement, depreciation records, ownership structure, and exchange documents.
Model the Sale Before the Closing Date
If you are evaluating a 2026 investment property sale, a consultation can help organize the estimated gain, exchange value, debt, state considerations, and DST replacement options for review with your CPA, attorney, and qualified intermediary. Starting before closing preserves the broadest range of Section 1031 choices.
