The 20 Percent Capital Gains Threshold: When the 20% Rate Applies in 2026

The 20% rate reaches only the part of the gain above the breakpoint

Section 1(h)(1) builds the capital gains tax in layers: 0% on adjusted net capital gain that fits below the zero-rate amount, 15% on gain that fits below the 15% amount, and 20% on 'the adjusted net capital gain... in excess of the sum of the amounts on which tax is determined' at the lower rates. Ordinary income is placed first, so the gain occupies the top of your taxable income.

Rev. Proc. 2025-32 sets the 2026 maximum 15% rate amounts at $613,700 for joint returns and surviving spouses, $579,600 for heads of household, $545,500 for single filers, $306,850 for married filing separately, and $16,250 for estates and trusts. The zero-rate amounts are $98,900 joint and $49,450 single; the 0% band and real estate sales covers the bottom of the table.

A gain that straddles the line is taxed at two rates. A joint filer with $400,000 of other taxable income and a $500,000 long-term gain pays 15% on the $213,700 that fills the band to $613,700 and 20% on the $286,300 above it. The whole gain is not repriced because part of it crossed the line.

The surtax turns 20% into 23.8%, and it starts far lower than the 20% line

Section 1411 charges 3.8% on the lesser of net investment income or modified adjusted gross income above $250,000 joint, $125,000 married filing separately, or $200,000 for everyone else. The Form 8960 instructions confirm those thresholds are not indexed for inflation, so by the time a gain reaches the 20% line the surtax is almost always running. Gain from the disposition of rental or investment real estate is net investment income.

The same instructions state that 'gain that isn't taxable by reason of... section 1031 (like-kind exchanges) isn't included in NII', so deferral removes the gain from both taxes at once. Whether the surtax applies to a rental sale and what a 1031 does to it is covered in full.

For an estate or non-grantor trust the surtax threshold is the dollar amount at which the top bracket begins, which Rev. Proc. 2025-32 sets at $16,000 for 2026, so a trust that sells reaches 23.8% almost immediately.

A hypothetical $700,000 rental gain is taxed at three rates on one return

Hypothetical: a married couple with $200,000 of taxable income from work sells a rental at a $700,000 gain, of which $150,000 is depreciation they claimed over the years and $550,000 is appreciation. Taxable income for the year becomes $900,000. Ignore state tax and selling costs.

• Ordinary income of $200,000 is taxed first under the 2026 joint table, about $33,400.
• The $150,000 depreciation layer is unrecaptured section 1250 gain. It is taxed next in the ordinary brackets, 22% and 24% here, for about $35,800, below the 25% ceiling that would apply to a seller already in the 32% bracket or above.
• The $550,000 of appreciation is adjusted net capital gain. Taxable income before it is $350,000, so $263,700 fills the 15% band to $613,700 (about $39,600) and the remaining $286,300 is taxed at 20% (about $57,300).
• The surtax is 3.8% of the lesser of net investment income ($700,000) or modified adjusted gross income above $250,000, roughly $682,000 here, so about $25,900.
• Total federal tax on the sale about $158,500, or 22.6% of the gain. Fully exchanged, the sale does not appear on the return at all and the couple pays tax only on the $200,000 of wages. Run your own numbers with your CPA.

Timing, splitting and deferring are the three levers on the 20% slice

Timing: the breakpoint is per year, so a sale that closes in January rather than December lands in a year without the prior year's other income, and a seller expecting lower income next year can wait. An exchange that starts late in the year has its own calendar problem, covered in straddling the tax year with a 1031.

Splitting: an installment note under section 453 spreads the gain over the years payments arrive, and a partial section 1031 exchange recognizes only the cash taken out. A seller whose other income is $400,000 can take about $213,700 of boot at 15% and defer the rest, which taking boot on purpose sizes in detail. The depreciation layer is recognized first when boot is taken, so the arithmetic is not simply 15% of the boot.

Deferring: a completed exchange keeps the entire gain, including the depreciation layer, off the return, and the replacement property can be a Delaware Statutory Trust interest when a direct purchase will not close within 180 days. High-income tax planning around a 1031 puts the three levers together.

The 20% line is the capital gains ceiling; the 25% layer and ordinary rates sit above it

Three parts of a real estate gain never see the 20% rate. Unrecaptured section 1250 gain is taxed at ordinary rates with a 25% ceiling under section 1(h)(1)(E), which with the surtax is 28.8%. Section 1245 recapture on cost-segregated components is ordinary income at up to 37%. And gain on property held one year or less is ordinary income under section 1222. The depreciation recapture rate in 2026 and short-term gains on real estate cover those layers.

For comparison, the 2026 ordinary brackets in Rev. Proc. 2025-32 reach 32% at $403,550 joint, 35% at $512,450 and 37% at $768,700, and for single filers 32% at $201,775, 35% at $256,225 and 37% at $640,600. The 20% rate is a bargain against those, which is why a seller with a short holding period or a dealer profile has more to gain from timing than a long-term investor does.

If the plan is to defer rather than pay, replacement property must be identified within 45 days and received within 180 days under section 1031(a)(3). Traditional DST solutions describe the replacement we broker.