How Much Tax Will I Really Pay If I Sell My Rental Without a 1031?

Five layers stack in a fixed order, and each one's rate depends on where the layer below it stopped

Your other taxable income goes on the bottom, the depreciation you took sits directly above it, the remaining long-term gain sits above that, and the 3.8% surtax is measured separately against your modified adjusted gross income. State tax then usually applies to the whole gain at ordinary rates.

Because the layers stack, the same $391,000 gain costs a couple with $60,000 of other income far less than one with $450,000. Nothing in the calculation is a flat rate you can look up.

• Layer 1 — your wages, rents and other taxable income, taxed on the ordinary 2026 tables.
• Layer 2 — unrecaptured §1250 gain, equal to the depreciation you claimed on the building, taxed at ordinary rates but never above the 25% ceiling in §1(h)(1)(E).
• Layer 3 — the rest of the long-term gain at 0%, 15% or 20%, using the 2026 breakpoints of $98,900 and $613,700 for joint filers.
• Layer 4 — 3.8% net investment income tax on the lesser of your net investment income or the amount your MAGI exceeds $250,000 joint, $200,000 single.
• Layer 5 — state income tax, which in most states ignores the federal rate structure entirely; check the rule for your state on the state pages.

Adjusted basis decides the size of the gain, and depreciation you never claimed still shrinks it

Adjusted basis is your purchase price plus capital improvements, minus depreciation and minus any casualty losses. Publication 527 is explicit that the depreciation subtracted includes "any depreciation that you were allowed to claim, even if you didn't claim it."

So a landlord who never ran depreciation on a Schedule E still has a basis reduced by 27.5 years of allowable deductions, and still has an unrecaptured §1250 layer to pay on. Catching those years up with a Form 3115 change of accounting method is a conversation to have with your CPA before you sign a listing agreement, not after closing.

On the other side of the subtraction, the amount realized is the contract price less commissions and the seller-paid closing costs, not the price on the sign.

The 25% on depreciation is a ceiling, not a rate: here the $80,000 layer costs 22% and 24%

This is the most commonly repeated error about rental sales. Section 1(h)(1)(E) imposes 25% on unrecaptured §1250 gain only as a maximum; the layer is taxed at whatever ordinary brackets it lands in once it stacks on your other income.

In the example below, $150,000 of other taxable income leaves $61,400 of room in the 22% bracket before the 24% bracket starts at $211,400. So $61,400 of the depreciation layer is taxed at 22% and $18,600 at 24%: $17,972, an effective 22.5%, not $20,000.

The 25% ceiling only binds once your ordinary bracket reaches 32%, which for joint filers in 2026 starts at $403,550 of taxable income.

Worked example: a $650,000 sale with $80,000 of depreciation leaves $96,454 of tax on a $391,000 gain

These are hypothetical round numbers for a married couple filing jointly in a state with a flat 5% income tax. Your own figures will differ, and your CPA or attorney should confirm the arithmetic before you rely on it.

The couple bought a rental for $300,000, claimed $80,000 of straight-line depreciation and sells for $650,000 with $39,000 of commissions and closing costs. They have $182,200 of adjusted gross income from other sources and take the $32,200 standard deduction, leaving $150,000 of other taxable income.

• Amount realized: $650,000 − $39,000 = $611,000. Adjusted basis: $300,000 − $80,000 = $220,000. Realized gain: $391,000.
• Depreciation layer: $80,000 stacked on $150,000 gives $61,400 at 22% and $18,600 at 24% = $17,972.
• Capital gain layer: $311,000 stacked from $230,000 up to $541,000, all below the $613,700 breakpoint, at 15% = $46,650.
• Net investment income tax: MAGI of $573,200 exceeds $250,000 by $323,200, which is less than the $391,000 of gain, so 3.8% of $323,200 = $12,282.
• Federal total $76,904; state at 5% of $391,000 = $19,550; combined $96,454, or 24.7% of the gain.
• Cash position: $611,000 arrives at closing and $514,546 is still yours after the returns are filed.

A cost segregation study moves gain out of the 25% ceiling and into ordinary recapture with no cap

If you accelerated deductions with a cost segregation study or bonus depreciation, part of your gain is no longer capped at 25%. Two separate things happen, and both raise the bill.

First, components reclassified as §1245 personal property are recaptured as ordinary income at your marginal rate, up to 37%, and §453(i) refuses to let an installment sale spread that piece. Second, land improvements stay §1250 property, but any depreciation taken above straight line is "additional depreciation" that Publication 544 treats as ordinary income rather than as the 25%-capped layer.

This is the case where exchanging usually wins by the widest margin, because the layer you would otherwise pay at 37% is deferred in full. Cost segregation and 1031 exchanges on large deals works through the interaction, and bonus depreciation funds are a separate way to offset the same income.

Suspended passive losses are released by a sale and stay trapped by an exchange

This is the one item that makes a sale cheaper than the headline number, and it is missing from almost every online calculator. Publication 925 allows prior-year unallowed passive losses when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated party.

A 1031 exchange is not a fully taxable transaction, so those losses stay suspended and follow you forward. If the couple above had $40,000 of suspended losses, selling would deduct them against ordinary income at 22% and 24% and cut the real cost of the sale by roughly $9,000.

Ask your preparer for the exact suspended loss figure from the current Form 8582 before you compare the two paths; it is often the difference between a close call and an obvious one.

The six lines to hand your CPA, and what an exchange does to each one

Build the comparison as six lines on one page, run it twice — once as a cash sale and once as an exchange — and the decision usually makes itself. Sell and pay the tax vs do a 1031 runs the same two columns side by side.

In a fully deferred exchange all four federal layers move to the replacement property's basis under §1031(d) and nothing is reported as gain on Form 8824. What stays exposed is boot: cash you keep, debt you do not replace, and any §1245 components that are no longer like-kind real property.

• 1. Contract price, minus commissions and seller-paid closing costs, equals amount realized.
• 2. Purchase price plus capital improvements, minus depreciation allowed or allowable, equals adjusted basis.
• 3. Line 1 minus line 2 equals realized gain.
• 4. Depreciation claimed on the building, capped at the gain, is the layer taxed at ordinary rates to a 25% maximum.
• 5. The remainder is stacked above lines 1 and 4 against the $98,900 and $613,700 breakpoints.
• 6. Net investment income tax on the lesser of the gain or MAGI over the threshold, then state tax on the whole gain, less suspended passive losses released.