When you sell investment property, you might expect to pay the long-term capital gains rates you see in the headlines: 0%, 15%, or 20%. But most real estate sales don’t work that way.
Your gain gets split into different buckets. Some gets taxed as ordinary income. Some gets hit with a 25% rate. And if you’re a high earner, there’s an extra 3.8% tax on top. The 0%, 15%, and 20% rates apply to whatever’s left over.
I see investors get surprised by their tax bill because they planned around the wrong numbers. Understanding how the rates actually apply can help you avoid that.
The 2026 Capital Gains Rates
For assets held more than 12 months, the federal long-term capital gains rates are 0%, 15%, and 20%. The rate you pay depends on your total taxable income for the year.
For 2026, the income thresholds are:
- 0% rate: Up to $49,450 (single) or $98,900 (married filing jointly)
- 15% rate: $49,451 to $545,500 (single) or $98,901 to $613,700 (married filing jointly)
- 20% rate: Above those upper limits
Your ordinary income fills the tax brackets first, then capital gains get stacked on top. This matters more than most people realize.
Say you’re married with $150,000 in W-2 income and you sell a property for a $75,000 gain. Your ordinary income already puts you above the $98,900 threshold, so your entire gain gets taxed at 15%. You can’t choose the 0% rate just because your gain alone is under $98,900.
Hold an asset for 12 months or less and you lose the preferential rates entirely. Short-term gains get taxed as ordinary income at rates up to 37%.
The Extra 3.8% Tax
High-income investors face an additional tax that doesn’t make the headlines: the Net Investment Income Tax.
The NIIT adds 3.8% on top of capital gains for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). These thresholds haven’t budged since 2013, so inflation pushes more people into NIIT territory every year.
For most physicians, attorneys, and successful business owners, this means the real federal rates are 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%), not the headline 15% or 20%.
Depreciation Recapture Impact
Real estate sales are different from stock sales because of depreciation. The IRS wants to “recapture” the depreciation you claimed during ownership, and recapture gets taxed at higher rates than capital gains.
Your total gain gets broken into three buckets:
- Ordinary income recapture – Cost segregation components like appliances, carpeting, and parking lots get taxed at regular income rates up to 37%.
- 25% recapture – Building depreciation creates “unrecaptured Section 1250 gain” taxed at a maximum 25% rate.
- Capital gains – Only the appreciation beyond your depreciated basis qualifies for the 0%, 15%, or 20% capital gains rates.
An example makes this clearer.
You bought a rental property for $1,000,000.
After allocating $200,000 to land, you had $800,000 in depreciable basis.
Over time, you claim $300,000 of total depreciation. Assume $200,000 came from shorter-life assets identified through cost segregation and accelerated through bonus depreciation, and $100,000 came from regular building depreciation.
You sell for $1,400,000. Because depreciation reduces your basis, your adjusted basis at sale is $700,000 ($1,000,000 − $300,000), making your total gain $700,000. That $700,000 breaks down like this:
- $200,000 cost segregation recapture → ordinary income (up to 37%)
- $100,000 building recapture → 25% rate
- $400,000 appreciation → capital gains (0%, 15%, or 20% depending on your income)
If NIIT applies, an additional 3.8% is layered on top of each category, bringing the total tax on those portions to 40.8% (ordinary income), 28.8% (unrecaptured §1250), and 18.8% or 23.8% for long-term capital gains, depending on your income level.
That’s a big difference from the 15% or 20% you might have expected on a $400,000 gain.
The Cost Segregation Trade-off
Cost segregation accelerates depreciation during ownership, which creates immediate tax savings. But it also means more of your gain at sale gets classified as ordinary income recapture instead of capital gain.
This trade-off usually works in your favor. Getting deductions today is worth paying higher taxes later because of the time value of money. Plus, you might have suspended passive losses from other properties that can offset the recapture.
Planning Around These Capital Gains Rules
Understanding how capital gains rates really work opens up planning opportunities.
If you’re having a low-income year, it might be a good time to realize gains and take advantage of lower rates on the appreciation portion.
Suspended passive losses from other rental properties can offset capital gains and depreciation recapture when you sell.
In some cases, qualifying as a real estate professional and materially participating can reduce or eliminate NIIT, depending on how the activity is treated.
Sometimes it makes sense to pay the tax now rather than deferring through a 1031 exchange, especially if you have losses to offset or you’re temporarily in a low tax bracket.
The headline capital gains rates of 0%, 15%, and 20% are just the starting point for real estate investors. Between depreciation recapture and NIIT, your effective rate on a property sale can be much higher.
This isn’t a reason to avoid cost segregation or real estate investing. It’s a reason to plan properly. Work with your CPA to model the tax impact of a sale before you list the property, not after you’ve signed a purchase agreement.
Real estate offers powerful tax benefits during ownership. Understanding how those benefits affect your taxes at sale helps you make better decisions and avoid surprises.
