Selling a property can bring a hefty payday. But it can also come with a tax bill you might not be expecting. Capital gains tax on real estate is a key cost to understand before making a sale. It affects how much money you keep from your profit. Let's break down the numbers and rules to help you plan better.
What Is Capital Gains Tax on Real Estate?
Capital gains tax is the fee you pay on the profit you make when selling an asset—in this case, real estate. The gain is the difference between what you originally paid for the property and the sale price, minus certain expenses like improvements or selling costs.
This tax applies differently depending on how long you owned the property and what kind of property it is. Generally, the tax comes in two forms:
- Short-term capital gains: For properties held one year or less, taxed like regular income.
- Long-term capital gains: For properties held more than one year, taxed at lower rates.
Federal Capital Gains Tax Rates for Real Estate in 2025
At the federal level, the rate you pay depends mainly on your taxable income and how long you held the property.
Long-term capital gains tax rates for most real estate sales:
| Income Bracket (2025) | Tax Rate |
|---|---|
| Up to $47,450 (single filer) | 0% |
| $47,451 to $518,400 (single filer) | 15% |
| Over $518,400 (single filer) | 20% |
- For married couples filing jointly, these brackets roughly double.
- These rates apply only if you held the property more than one year.
- If you sell within a year, gains are taxed at your ordinary income tax rate, which can be as high as 37%.
Additional Taxes for High Earners
Investors making a lot of money also pay a 3.8% Net Investment Income Tax on capital gains income above certain thresholds ($200K single, $250K married filing jointly).
Depreciation Recapture
If you've claimed depreciation on rental property, the IRS taxes the recaptured amount at a maximum rate of 25% when you sell.
State Capital Gains Tax on Real Estate: What to Expect
State taxes vary dramatically. Some states charge capital gains as ordinary income tax. Others don't have a state income tax at all.
Here’s a quick look at some key states:
| State | Capital Gains Tax Rate on Real Estate |
|---|---|
| California | Up to 14.4%, taxed as ordinary income |
| New York | Up to 10.9%, taxed as ordinary income |
| Texas | No state income tax, so no capital gains tax |
| Florida | No state income tax, no capital gains tax |
| Colorado | Flat 4.55% |
| Oregon | Up to 9.9%, taxed as ordinary income |
Many states simply treat capital gains as regular income, so the rate will match your state income tax bracket.
Pro tip: If you’re planning to sell an investment property, check state capital gains rules where the property is located and where you file taxes.
Photo by Thirdman
How the Primary Residence Exclusion Can Save You Thousands
If the property you sold was your main home, you might qualify to exclude a big chunk of your gains from taxes.
- Single filers can exclude up to $250,000.
- Married couples filing jointly can exclude up to $500,000.
To qualify:
- You must have owned and lived in the home for at least two out of the last five years.
- The exclusion can only be used once every two years.
If you meet these rules, you can avoid paying capital gains tax on a large portion, or even all, of your profit.
Using a 1031 Exchange to Defer Capital Gains Tax
A 1031 exchange lets you swap one investment property for another without paying capital gains taxes right away.
- You must reinvest proceeds into a "like-kind" property.
- The timeline and paperwork are strict.
- Taxes are deferred until you sell the new property without another 1031 exchange.
This is a popular option for real estate investors who want to keep growing their portfolio without losing gains to taxes immediately. But it’s best to get advice from a tax professional before trying this strategy.
Strategies to Lower Capital Gains Tax on Real Estate
There are a few ways to reduce the bite of capital gains tax:
- Hold the property for over one year to get long-term tax rates.
- Use the primary residence exclusion if possible.
- Track all improvements and selling costs to raise your cost basis and reduce your gain.
- Consider a 1031 exchange for investment properties.
- Time your sale in a year when your income is lower.
- Offset gains by using tax-loss harvesting (selling other investments at a loss).
What Happens If You Sell Quickly (Short-Term Gain)?
If you hold the property for one year or less, capital gains are taxed at your regular income tax rates. For many, that means paying more than double what you would pay on a long-term gain.
This can range from 10% up to 37% at the federal level, plus any applicable state taxes.
Final Thoughts on Capital Gains Tax and Real Estate
Capital gains tax is a big part of the real estate selling equation. Knowing the federal and state rates can help you plan your sale to keep more of your profits. Take advantage of the primary residence exclusion when selling your main home, and consider strategies like 1031 exchanges for investments.
Taxes can be confusing, and rules change. It pays to work with a tax advisor who can tailor advice to your situation. When you understand capital gains tax rules, you keep surprises out of your selling process—and that’s good for your wallet.
Keep your goals clear and your tax strategy sharp. The right moves can save you thousands.
With the right information, you don’t have to let the tax man take an unfair chunk of your real estate profits. Understanding capital gains is your first step to smarter selling.