Types of Capital Gains

Short-term capital gains:

Profit from the sale of a property held for one year or less. Taxed at ordinary income tax rates up to 37% federally for high earners. This is the primary reason most flippers are taxed so heavily: flip properties are rarely held for more than 12 months.

Long-term capital gains:

Profit from the sale of a property held for more than one year. Taxed at preferential federal rates of 0%, 15%, or 20%, depending on taxable income. Most buy-and-hold investors benefit from this rate when they eventually sell.

Depreciation recapture:

When you sell a rental property, the IRS recaptures the depreciation deductions you took over the holding period and taxes them at a maximum federal rate of 25%. This is in addition to capital gains on appreciation above your original purchase price.

Net Investment Income Tax (NIIT): A 3.8% surtax applies to investment income (including capital gains) for taxpayers above certain income thresholds ($200,000 single / $250,000 married filing jointly).

Primary Residence Exclusion (Section 121)

If a property was your primary residence for at least 2 of the last 5 years before sale, you can exclude up to $250,000 in capital gains from federal tax ($500,000 for married couples filing jointly). This exclusion can be used once every two years. Many investors use this strategy, living in a property for two years before converting it to a rental or selling.

1031 Exchange — The Primary Deferral Tool

As covered in detail in the 1031 Exchanges page, Section 1031 of the Internal Revenue Code allows investment property sales to be structured as tax-deferred exchanges into like-kind replacement property. This is the most powerful tool for deferring capital gains in real estate.

Installment Sales

If you sell a property and carry back financing for the buyer (seller financing), you can report the gain over the period you receive payments rather than all at once. This can spread the tax liability over several years, potentially keeping you in lower tax brackets each year.

Opportunity Zone Investments

By investing capital gains into a Qualified Opportunity Fund within 180 days of a sale, you can defer those gains until December 31, 2026 (or until you sell the opportunity zone investment, whichever comes first). If you hold the opportunity zone investment for 10 years, any appreciation on that new investment is completely excluded from tax.