- Finance Management
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How Do I Minimize Capital Gains Tax When Selling My Rental Property in the United States?
Key Takeaways
- A capital gain is the profit you earn when you sell your rental property for more than you originally paid.
- A short-term capital gain occurs when you sell your rental after holding it for a year or less; it is taxable at your ordinary tax rate. Long-term capital gains apply to sales where you owned the rental for over a year; these are taxable at 0%, 15%, or 20%, depending on your taxable income.
- Several strategies exist for minimizing capital gains taxes. These include using a 1031 tax-deferred exchange, applying losses from other investments against your profit, and converting your rental into a primary residence.
Updated on Mar 11, 2026
Selling your rental property can reward you with a handsome profit. But a portion is subject to the capital gains tax, meaning you won’t take home 100% of the money.
Luckily, there are strategies you can use to reduce your capital gains tax bill, in some cases down to zero. In this guide, we’ll explain how capital gains on rental properties are taxed and how to lessen the sting of paying the IRS its share of your profit.
What are capital gains?
A capital gain on a rental property is the profit you earn after selling it for a higher price than you originally paid. In the U.S., capital gains are taxable income, which means you must report the profit when filing your tax return.
The tax rate for capital gains ranges from 0% to 37%, depending on several factors. These include your total taxable earnings for the year of sale, your filing status, and how long you owned the property before selling it.
How are capital gains taxed?
Several factors impact the amount of capital gains tax you’ll owe after selling your rental property. The primary one is the length of time you owned it before its sale. Depending on this period, the IRS will classify your capital gain as short-term or long-term.
Short-term capital gains
A short-term capital gain applies when you sell an asset, such as a rental property, within one year of acquiring it.
The IRS taxes this type of gain as regular income. That means you’ll pay a tax rate between 10% and 37% on your profit, depending on your federal tax bracket.
Of course, you may also have to pay capital gains tax at the state level, which varies depending on where you live. Much like the federal level, the higher your taxable income during the year you sell your rental, the more tax you can expect to pay.
Long-term capital gains
A long-term capital gain occurs when you sell your rental property after holding it for more than a year.
Under this scenario, you may owe the IRS less as long-term gains receive more favorable tax treatment. Here are the rates you can expect to pay for the 2025 tax year if you’re a single-income earner:
- 0% for taxable income up to $48,350
- 15% for taxable income more than $48,351 but less than or equal to $533,400
- 20% for taxable income more than $533,400
Different income ranges may apply if you’re married, and whether you file your taxes jointly or separately. For example, if you’re married and filing a joint tax return, the tax rate is 0% for a combined taxable income up to $96,700. .Â
To determine which capital gains tax rate applies to your situation, visit IRS Topic no.409, Capital Gains and Losses.
Two additional factors influence how much tax you pay on your long-term rental property gain:
- State capital gains tax. Depending on where you live, state taxes may apply to your profit as well. Some states, such as Alaska, Florida, and Texas, don’t tax capital gains, but most do, with some charging double-digit rates.Â
- Net Investment Income Tax (NIIT). You must pay this extra tax if your taxable income exceeds $200,000 ($250,000 if you’re married and filing jointly and $125,000 if filing separately). If that’s the case, your actual federal capital gains tax rate is $23.8%.
Tips to reduce capital gains tax on rental property sales
Now that you have a solid grasp of how capital gains on rental properties work, let’s look at ways to minimize the tax hit they bring.
Sell your rental property at the optimal time
Time can be a great ally in helping you reduce your capital gains tax liability.
First, long-term capital gains are taxed at much lower rates than short-term gains. The highest rate applied is 20% compared to 37% for short-term gains. And if you earn a relatively low income, you may pay zero tax on your profit. Holding off on selling your rental for at least one year can be hugely advantageous.
Second, long-term capital gains are subject to a progressive tax structure, which means you’ll pay more if your taxable income breaches certain thresholds. If you experience significant income swings, consider waiting to sell your rental in the year you earn less overall.
Use a 1031 tax-deferred exchange
Section 1031 of the American tax code is a nifty tax break that allows you to postpone paying capital gains tax. Under this strategy, you sell your rental property and roll over the profit into a new property, thereby deferring the tax indefinitely.
The IRS calls this arrangement a “like-kind exchange” because it involves replacing one type of real estate property with another similar one. What qualifies as a “like-kind” property is pretty broad. According to the IRS, it encompasses properties that are of the “same nature or character, even if they differ in grade or quality.”
As a result, you don’t necessarily have to trade a townhouse for another townhouse; the replacement property can be a condo or detached home. Provided that you use the new property to generate income through a lease agreement and not as your personal home, you should be fine.
However, you’ll have to move quickly with this strategy: The IRS gives you only 45 days to identify a suitable replacement property following the sale of your original rental. Furthermore, you must close a deal on your new property within 180 days or before your tax return is due, whichever is sooner. If you fail to complete the process within this time frame, you’re liable for the entire capital gains tax.
Offset your gain with losses
Do you have capital losses you’ve incurred from selling other investments during the same year you realized a gain on your rental? If so, apply these losses against your rental’s profit, lowering your taxable capital gain. This method is called tax harvesting.
For example, let’s say you earned $80,000 in profit from selling a rental property. But you also realized a $20,000 loss on the sale of another rental unit and a further $10,000 loss on stocks you own. In this scenario, you can offset your $100,000 gain by pairing it with the $30,000 loss on your other investments. Your taxable capital gain will then be only $50,000.
Deduct eligible selling expenses
You may have to cover various out-of-pocket costs when you sell a rental property. Some examples are real estate commissions, appraisal, legal, advertising, and inspection fees.
The good news is that you can deduct these expenses from your total sales proceeds, reducing your capital gain and, in turn, your tax bill. Just remember to keep the receipts in case the IRS wants to see them.
Increase your property basis
The property basis represents the total capital you’ve invested in your rental, including the original purchase price. The higher this number is, the lower the capital gain you’ll realize on your sale, so it pays to do what you can to increase it.
Start by tallying all transaction and settlement costs you paid when you first acquired your rental—you can add them to the property basis. Examples include abstract fees, legal fees, land surveys, and land transfer taxes. You can find a complete list in IRS Publication 551.
Next, account for all the capital improvements you’ve made, such as HVAC replacements, kitchen renovations, and window upgrades. These outlays can significantly lower your capital gain, leaving you with a much smaller tax bill to pay.
Convert the rental to a primary residence
Living in your rental property for a few years before selling it can help you avoid paying a substantial amount of capital gains tax.
A primary residence receives more preferential tax treatment than a rental property. Section 121 of the tax code allows you to exclude up to $250,000 of the profit on the sale of a home where you live. If you’re married and filing a joint tax return, this exemption increases to $500,000.
To qualify for this generous tax break, you must have owned and used the property for at least two of the five years before selling it. In addition, you must not have excluded capital gains taxes on any other property sale within the past two years.
Screen applicants thoroughly with credit, background, and income verification—so you reduce risk, avoid surprises, and protect your rental income.
Our final thoughts
Selling a rental property at a profit triggers a capital gain, which is subject to tax. Depending on your personal and financial circumstances, you could owe quite a bit of money to the IRS come tax season.
Luckily, there are strategies available to minimize capital gains tax liability. But not all will be equally suitable for your situation. So, if you plan to sell your rental property soon, speak with a tax expert for guidance. They can help you choose the best way to structure your rental sale to minimize capital gains taxes.
To learn more about how taxes impact your rental property and ways to minimize how much you pay, visit our Finance Management page.
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