Selling rental property and 1031 exchanges
When you sell a rental, the tax depends on how much depreciation you took and your income that year. A 1031 exchange can defer all of it. Here is the math, with an example, and the deadlines.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 9, 2026.
How the gain is figured
Gain = what you sell for (less selling costs) minus your adjusted basis. Your adjusted basis is what you paid, plus improvements, minus the depreciation you took or could have taken.
An example
| Amount | |
|---|---|
| Bought for | $400,000 |
| Depreciation taken | $60,000 |
| Adjusted basis | $340,000 |
| Sold for | $520,000 |
| Total gain | $180,000 |
| Taxed up to 25%: gain from depreciation | $60,000 (up to $15,000 of tax) |
| Taxed at 0%, 15% or 20%: the rest | $120,000 (for example 15% = $18,000) |
Selling costs, state tax and the 3.8% net investment income tax are not included. Your income that year decides the rates.
2026 rates
| Filing status | 0% up to | 15% up to | 20% above |
|---|---|---|---|
| Single | $49,450 | $545,500 | Over $545,500 |
| Married filing jointly | $98,900 | $613,700 | Over $613,700 |
| Head of household | $66,200 | $579,600 | Over $579,600 |
| Married filing separately | $49,450 | $306,850 | Over $306,850 |
1031 like-kind exchanges
- Real property only. Real estate held for investment or business can be exchanged for other real estate. Personal property no longer qualifies.
- 45 days: identify the replacement property in writing after you transfer the one you give up.
- 180 days: receive the replacement property within 180 days, or by your return due date including extensions if that is earlier.
- Qualified intermediary: use one so you never have access to the cash.
- Boot is taxable: cash or debt relief you receive is taxed.
- Report it on Form 8824 with your return.
- Related parties and holding periods have special rules. Plan before you list the property.
Other planning ideas
- Installment sale: spread the gain over years, but depreciation recapture is taxed in the year of sale.
- Timing: a sale in a lower-income year can push gain into the 0% or 15% bracket.
- Suspended passive losses are released when you sell and can offset the gain.
Common questions
What is depreciation recapture?
The part of your gain that comes from depreciation you took (or could have taken) on real property is taxed at up to 25%, higher than the regular capital gain rates. Depreciation on appliances and other personal property parts is recaptured as ordinary income.
What are the 2026 capital gain rates?
Long-term gains are taxed at 0% up to $49,450 of taxable income for single filers ($98,900 joint), 15% up to $545,500 ($613,700 joint), and 20% above. Higher-income taxpayers may also owe the 3.8% net investment income tax above $200,000 ($250,000 joint).
How does a 1031 exchange work?
You exchange investment or business real property for other real property of like kind and defer the gain. You must identify the replacement property in writing within 45 days and receive it within 180 days (or by your return due date, including extensions, if earlier), usually using a qualified intermediary so you never touch the cash.
Does a 1031 exchange avoid tax forever?
No, it defers it. Your basis and depreciation history carry over to the new property. Tax is due when you eventually sell without an exchange, unless the property passes to heirs, who generally receive a stepped-up basis.
Can I use the home sale exclusion on a rental?
Only on a home you owned and used as your main home for at least 2 of the last 5 years, and gain from depreciation taken after May 6, 1997 is not excluded. Converting a rental to a home, or the reverse, has special rules, so ask us first.
Official sources
- IRS Publication 544: Sales and other dispositions of assets
- IRS: Instructions for Form 8824 (like-kind exchanges)
- IRS Publication 537: Installment sales
- IRS: 2026 inflation adjustments (Rev. Proc. 2025-32)
- IRS Topic 409: Capital gains and losses
- IRS Topic 701: Sale of your home
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