Thinking About Selling a Rental Property? Read This Before You List

By Jeff Bibby, CPA · October 31, 2026 · 5 min read

Owners tell us what the property might sell for. The number that matters is what's left after taxes, and most of that bill is set before you sign a purchase and sale agreement.

Selling a rental property without a plan usually ends in one surprise: depreciation. You took it over the years, it comes back at sale, and it's taxed differently from the rest of your gain. Here's how it works and what you can do while there's still time.

How the taxable gain on a rental sale is figured

Your taxable gain is the net sale price minus your adjusted basis. Adjusted basis is what you paid for the property, plus closing costs and capital improvements, minus the depreciation you took or could have taken.

That last part catches people. If you never claimed depreciation, the IRS treats it as if you did. Skipping it never saved you anything.

Selling costs reduce the gain: agent commissions, attorney fees and transfer taxes. Keep the closing statements for the purchase and the sale. Repairs that keep a place rented are generally deductible expenses, not improvements, so the line between the two matters. A new roof is an improvement. Patching a leak is a repair.

Depreciation recapture and capital gains tax on a rental sale

A gain on a rental held more than a year is a long-term gain, taxed at 0%, 15% or 20% federally depending on your income. The piece of the gain that equals the depreciation you took is taxed separately, at up to 25%. That's called unrecaptured Section 1250 gain.

On top of that, a 3.8% net investment income tax can apply once your income passes $200,000 (single) or $250,000 (married filing jointly). Those thresholds aren't adjusted for inflation. Your state taxes the gain too, and the rules differ by state.

Here's a made-up example to show the shape of it:

• Purchase price $300,000, plus $20,000 of improvements.
• Depreciation taken: $60,000, so the adjusted basis is $260,000.
• Sale price $550,000, less $35,000 of selling costs, leaves $515,000.
• Total gain: $255,000.
• Taxed at up to 25%: the $60,000 of depreciation.
• Taxed at 0%, 15% or 20%: the other $195,000.

If the rest lands in the 15% bracket, the federal bill is about $44,000 before the net investment income tax and state tax: roughly $29,000 on the $195,000 and up to $15,000 on the depreciation. Your numbers will differ, which is why you run them before you list, not after you close.

Ways to defer or reduce the tax: 1031 exchange and more

There are a few legitimate options. Each has rules, and each has to be set up before closing.

• 1031 exchange. If you reinvest the proceeds in another investment property, you can defer the gain. You use a qualified intermediary, identify the replacement property within 45 days and close within 180. If the sale money lands in your own bank account, the exchange generally fails.
• Choose the closing year. The gain lands in the year the sale closes. Moving a closing from December to January, or the reverse, can change your bracket and your exposure to the net investment income tax.
• Installment sale. If the buyer pays you over several years, you can spread the gain over the years you're paid. Depreciation on items like appliances, or from a cost segregation study, is generally taxed in the year of sale even if the payments come later.
• Offsetting losses. Suspended passive losses from the property are generally released when you sell your whole interest in a fully taxable sale to an unrelated buyer. Capital losses elsewhere can offset the gain.

None of these fits everyone. A 1031 exchange, for example, commits you to buying another property on a tight clock. Weighing it against simply paying the tax and walking away with the cash is what our tax planning work is for.

If an LLC or partnership owns the rental

Many rentals sit in an LLC taxed as a partnership, often with two or more owners. The sale is reported on the entity's return, and each owner's share flows to their own return on a K-1. Each owner may land in a different tax position, so one owner may want to exchange while another wants cash.

Before you list, check the operating agreement. It controls who has to approve a sale, how proceeds are split and what happens if the owners disagree. Make sure each owner's basis is tracked, because it's the starting point for their own gain.

If you want to exchange into new property, the exchange happens at the entity level. Owners who want out usually have to be dealt with before the sale, not after.

What to gather before you list

• The closing statement from when you bought the property.
• Records of improvements, with dates and costs.
• Depreciation schedules from your prior returns.
• The operating agreement, if an LLC or partnership owns it.
• A rough idea of the sale price and your target closing date.

We work with landlords across Rhode Island and Southeastern Massachusetts. A call before you list is worth far more than one after you close.

This article is general information, not tax or legal advice for your specific situation. Tax rules change; talk with us before acting on it.