What the Tax Bill Looks Like When You Sell

Why this page states no total

It would be easy to end this page with a dollar figure, and most pages that promise a tax bill do. This one does not, and the reason is worth stating before anything else rather than as an apology at the end.

The layers are general. The rates that apply to them are not. Your ordinary income and your preferential income (gain that qualifies for the lower capital-gain rates) stack against each other. So which bracket a slice of gain actually lands in depends on the rest of your return: your other income, your deductions, your filing status, and how much of each layer you have. Two owners with an identical property and an identical gain can owe materially different amounts, and neither of them is doing anything unusual.

So the assembly carries over to your sale, and the total does not. What this page can give you exactly is the order, the pieces, and the one computation that is genuinely self-contained. What it cannot responsibly give you is a number to put in your own model, and a page that supplies one anyway has traded a real lesson for a satisfying ending.

The number is not the deliverable. The order is. If you know which layers exist and where each one enters, you can ask your own tax professional a precise question — and check the answer.

The order

Everything below runs in this sequence, and the sequence is not optional:

Amount realized → less adjusted basis → equals realized gain → allocated asset by asset → ordinary income carved out first → everything remaining enters §1231 → the rate categories sit inside whatever long-term gain survives → the released suspended loss lands in the same year → the net investment income tax runs its own test.

The examples throughout these guides use one property — a single-family rental bought for $280,000, an illustration rather than a forecast, whose base rental assumptions are listed in The Operating-Expense Build & the 50% Rule. What follows takes it through an illustrative sale on 31 December of year five, with its value assumed to grow 3% a year and depreciation taken under the mid-month convention in the first and last years, so the steps have real numbers attached rather than placeholders. The figures are this property's; the lesson is the order.

Step one — what you actually realize

The sale price is not what you realize. Selling costs come out first.

The 7% used for selling costs here is a stated modeling assumption, not a market rate. It stands for brokerage commission plus the seller's closing costs, it was chosen for this worked example, and your own figure belongs in its place. Nothing in the order below changes if your number is different.

That subtraction is not a rounding detail. $22,722 of the property's value never reaches you and never reaches the tax computation either — and it is the first thing standing between the equity you were told you had and the cash you end up with.

Step two — the basis you subtract

Gain is measured from your adjusted basis, and that number is the subject of its own page. Bring it here; this page does not rebuild it.

The one thing worth carrying across: depreciation lowered your basis every year you owned the property. That is what the deduction does. So the basis you subtract at sale is well below what you paid, which means the gain is larger than "what it went up in value" — often by a wide margin on a long hold.

Step three — the gain, and the order it gets characterized in

Now the step the one-rate shortcut leaves out. That gain is not taxed as one thing. But it does not simply split into pieces either. It runs through an order that settles the character of each part: whether the tax law treats it as ordinary income or as capital gain, which decides the rates it meets. That order is the whole subject of the page on depreciation and gain character at sale. This page assembles what that page decided; it does not re-derive it.

First, the allocation — which comes before any character question

Where a sale includes more than one asset — the land, the building, separate §1250 site improvements, separate §1245 assets — the price is allocated among them, and gain or loss is measured asset by asset. That is why every cap below speaks of the gain attributable to a component rather than to the property as a whole.

The worked example that follows assumes that allocation has been done, and that the depreciation-related gain is attributable to the building. That assumption is doing real work. On a property where the land appreciated and the building did not, the amounts below move even though the total does not — because unrecaptured §1250 gain is limited twice over — it can be no more than the depreciation taken on the building, and no more than the gain attributable to the building — and in that case it is the second limit that binds.

Then ordinary income is carved out — first, and on its own

Why: This property has no separately depreciated personal-property components. A cost-segregation study is not what creates a §1245 bucket — separately depreciated personal property is, so a rental with appliances, furniture or equipment on their own schedules can have one with no study at all. This one does not.

Depreciation taken in excess of straight-line on §1250 property held more than a year is ordinary income too. On a modern straight-line rental building there generally is none, and there is none here. The holding period is part of that rule rather than a detail of it: for §1250 property held a year or less, it reaches all of the depreciation adjustments rather than only the excess.

Everything that remains enters §1231 — including the building's depreciation

The full $61,923, since nothing was carved out as ordinary. The §1231 rules net it against your other business-property gains and losses and can look back at nonrecaptured §1231 losses from the previous five years, before any treatment is settled. Those are net business-property losses from those years that have not yet been used to turn a later gain into ordinary income.

If that process leaves a net gain receiving long-term capital-gain treatment, that gain is what contains the rate categories:

This is the relationship the shorthand gets wrong, and it is worth stating plainly: unrecaptured §1250 gain does not sit beside §1231 gain as a separate final category. It is a rate category inside the long-term capital gain that survives §1231 — which means both amounts above are contingent on that netting, not only the second. If the §1231 process does not leave that net gain, the unrecaptured §1250 category cannot simply be assumed.

Two checks worth running on your own numbers, and they sit at two different levels rather than being one three-way sum.

The carve-out check is unconditional. Ordinary recapture plus everything else equals the realized gain — here, $0 + $61,923 = $61,923.

The rate split reconciles to the gain that actually survives §1231 — not to the gain you started with. On this example's stated assumption, that the netting and the lookback leave the whole $61,923 as long-term capital gain, it is $40,048 + $21,875 = $61,923. Change that assumption and the split has to be recomputed — which is not the same as saying both figures change. The unrecaptured §1250 category is limited by the surviving long-term gain rather than scaled down with it. Where enough gain survives to cover that category it can stand at its full amount, and only the appreciation piece shrinks. Where less survives, the limit binds and the category itself is the smaller number. Either way the check is the same: the pieces reconcile to the gain that actually survives, whatever the netting produces — and a correct partial-survival computation is not a mislabeled one.

What the empty bucket is teaching

The zero is not a gap. This property has nothing on a separate personal-property schedule, so it genuinely has no §1245 ordinary-income piece — and because that carve-out is empty, something else becomes visible that a more complicated example would bury.

$40,048 of a $61,923 gain — about two-thirds of it — is attributable to depreciation deductions already taken, not to the property's rise in value. The appreciation slice is $21,875. The depreciation slice is nearly twice as large.

That is not a quirk of this example. It is what a long hold on a modest single-family rental can look like, and it is the part of the bill that is easiest to overlook — because nothing about it shows up in the sale price. The deductions were real and they were worth having. They also, in part, postponed tax rather than removing it, and this is the year that part is settled.

Step four — the rate layers

Each piece meets a different rule. These are the maximum and structural rates, which is deliberate: the taxable-income breakpoints inside them change every year, and a page that tabulated them would be wrong within twelve months.

Two things about that 25% that get misread constantly. It is a maximum, not a rate — an owner whose ordinary rates are below 25% does not pay 25% on this piece. And it is a capital-gain category, not ordinary income and not "recapture" in the §1245 sense, which is why it sits in this table rather than the first row.

(A 28% maximum exists for collectibles. It is named here only so the 25% above is not read as a general rate on anything called recapture — it has nothing to do with real estate.)

Whether the §1231 process leaves long-term capital gain at all depends on facts this property cannot supply — and that caveat governs both of the capital rows above, not just the last one. Net §1231 gain is subject to a five-year lookback: where you had non-recaptured net §1231 losses in the preceding five years, current-year net §1231 gain can be treated as ordinary income to that extent. That is a fact about you, not about the property.

Which is why the unrecaptured §1250 row is contingent too. That category exists only inside long-term capital gain that survives the netting; it is not a separate result that arrives whatever else happens on your return. The worked example below states an assumption rather than a conclusion for exactly this reason.

Step five — the released suspended loss lands in the same year

If the property carried suspended passive losses and the disposition qualifies under §469(g), the balance becomes deductible in the same year the gain lands. On this property the losses allowed in the year of sale total $18,629: the suspended carryforward at the start of the year, $16,454, plus the year-of-sale passive loss, $2,175.

The intuitive version of what happens next is that the loss offsets the gain and you are taxed on the difference. That is not what happens, and the difference matters more than it looks:

The qualifying disposition makes the $18,629 of losses allowable (the carryforward and the year-of-sale loss together), but it does not convert the sale gain into a smaller capital-gain number. The gain and the allowed loss remain reported according to their own character, on the forms and schedules where they belong. The loss reduces taxable income, but its actual tax value depends on the rest of the return, so it should not be valued simply by multiplying it by an assumed ordinary marginal rate.

What releases a suspended loss — and what only looks like it does — is the suspended-loss page's subject, and the conditions are not trivial. This page starts after the release has happened. It is worth knowing that a qualifying 1031 exchange generally does not produce one, because where gain stays deferred the recognition condition is not met — though §469(g) turns on whether all realized gain or loss was recognized rather than on the §1031 label. That page and the exchange page own the interaction.

Step six — the 3.8% test, which is not 3.8% of your gain

The net investment income tax is the layer most easily mis-estimated, and the shortcut that causes it is worth naming precisely.

One predicate before the arithmetic: this gain is net investment income because this activity is passive. §1411 reaches net gain from the disposition of property held in a passive activity; gain from property held in a §162 trade or business that is non-passive to you is outside it. The worked example below rests on the same assumption the suspended-loss balance above rests on — that the rental has been an always-passive activity with respect to its owner — and that assumption is what puts the whole disposition gain into net investment income. An owner whose rental is a §162 trade or business that is non-passive to them (for a rental, generally real estate professional status plus material participation) can be outside §1411 on the same sale, in which case none of the arithmetic below runs at all. The arithmetic below depends on this assumption; it is not a formality, and it is a fact about you rather than about the property.

It is not 3.8% of the gain. It applies to the lesser of two amounts: your net investment income, or the amount by which your modified adjusted gross income (MAGI) exceeds a statutory threshold. Neither of those is the gain — net investment income can be smaller than the gain, as it is here, and it can also be larger where you have other investment income.

Both halves matter here. The released suspended loss is a properly allocable deduction in computing net investment income, so it reduces the first amount before the comparison is made:

Now the comparison. Assume, for this example only, a married-filing-jointly return whose modified adjusted gross income exceeds the $250,000 threshold by $38,294 — an illustrative figure for this one return, not something every sale produces:

The excess governed, not the net investment income. That is the entire reason the rule is written as a lesser-of test, and it is invisible in any example that simply multiplies the gain by 3.8%. Here that shortcut would have produced $2,353, on a base that does not apply to this example: neither amount the test compares is the gain. (The tax can come to 3.8% of a gain, but only where the gain is the net investment income and is also the smaller amount.)

The thresholds do not move

The statutory thresholds are $250,000 for married filing jointly, $200,000 for single and head of household, and $125,000 for married filing separately.

§1411 contains no inflation-adjustment provision. The rate structures above have breakpoints that are adjusted annually. These thresholds are not. So rising nominal incomes can bring more owners within range of the tax over time without Congress changing the thresholds — and a threshold that looked remote when the rule was written does not stay remote. That is a planning fact, not a footnote.

What is left, and what it says about the equity

Cash Return on Current Equity & the Wealth Engines puts this property's equity in year five at $129,183. Here is what converting it involves.

$129,183 of equity, and $106,461 reaches your account before any tax at all. The difference is exactly the selling costs — a check worth running, because equity minus cash before tax should equal what it cost to sell.

That is $22,722 of $129,183 gone before the first tax layer is applied. Whatever the layers above come to on your return, they come out of what is left.

None of this says selling is wrong. It says the equity a balance sheet reports and the cash a sale produces are different numbers, and the gap is knowable in advance. What to do about it is the next page's question, not this one's.

What this page does not model

State income tax is a real layer and is not modeled here. States vary in whether and how they tax capital gain, and several do not follow the federal characterization. For an owner in a high-rate state it can be the difference that decides a transaction, and it belongs in your own model beside everything above.

Nor does this page model your return. Every figure above that belongs to the property is exact. Every figure that would require knowing your other income, your deductions, your filing status or your §1231 history has been left where it belongs — with you and your tax professional.