The Zero Percent (0%) Capital Gains Bracket and Real Estate Sales

The band is measured on taxable income including the gain, not on the gain alone

Section 1(h)(1)(B) taxes at 0% 'so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess' of the top of the band over 'the taxable income reduced by the adjusted net capital gain'. In words: take the gain out of taxable income, see how much room is left under the band, and only that much gain is taxed at 0%. Everything above it starts at 15%.

Rev. Proc. 2025-32 sets the 2026 maximum zero rate amounts at $98,900 for joint returns and surviving spouses, $66,200 for heads of household, $49,450 for single and married-separate filers, and $3,300 for estates and trusts. The 15% rate then runs to $613,700 joint or $545,500 single, and 20% applies above that. When the 20% rate applies has the full table.

Taxable income is measured after the standard deduction, which the same revenue procedure sets at $32,200 joint and $16,100 single for 2026, plus $1,650 for each spouse aged 65 or over ($2,050 for an unmarried person). The IRS also describes a separate $6,000 deduction for each person aged 65 or over for 2025 through 2028 under the July 2025 tax act, which phases out once modified adjusted gross income passes $75,000 single or $150,000 joint, so a big sale year usually loses it.

A retired couple with $40,000 of other income can take about $94,000 of gain at 0%

Hypothetical: a married couple, both over 65, with $40,000 of pension and interest income and no itemized deductions. Their standard deduction is $32,200 plus $3,300, so taxable income before any sale is $4,500 and the band has $94,400 of room.

• They sell investment land held five years at a $150,000 gain. $94,400 is taxed at 0% and $55,600 at 15%, so federal tax on the sale is about $8,340 and there is no surtax, because modified adjusted gross income is below $250,000.
• Suppose instead the $150,000 gain is on a rental and $50,000 of it is prior depreciation. That $50,000 is taxed first in the ordinary brackets, at 10% and 12% here, for roughly $5,600. It also lifts the ordinary layer to $54,500, leaving only $44,400 of room under the band. The remaining $100,000 of appreciation is $44,400 at 0% and $55,600 at 15%, for about $8,340. Total about $13,900, roughly $5,600 more than the land sale.
• Either way the gain raises the income counted under section 86, which taxes up to 85% of Social Security benefits once modified income plus half the benefits passes $44,000 on a joint return, so part of the benefit becomes taxable in the sale year too. Run your own numbers with your CPA.

Depreciation never gets the 0% rate, and the order it is taxed in costs real money

Section 1(h)(3) defines adjusted net capital gain, the only gain eligible for the 0%, 15% and 20% rates, as net capital gain 'reduced (but not below zero) by the sum of unrecaptured section 1250 gain and 28-percent rate gain'. The depreciation you took, or were allowed to take, on a rental comes back as unrecaptured section 1250 gain, which section 1(h)(1)(E) taxes at your ordinary rates with a ceiling of 25%.

The Form 1040 instructions route a return with unrecaptured section 1250 gain to the Schedule D Tax Worksheet, which places that layer in the ordinary brackets before the capital gain. A low-income seller therefore pays 10% or 12% on it rather than 25%, which is cheap, but the layer also uses room under the band that the appreciation would otherwise have taken at 0%. The recapture rate and how it stacks and how much recapture a rental sale produces are on their own pages.

A partial exchange or an installment sale lets you use the band every year instead of once

The band resets each tax year. A seller who recognizes the whole gain in one year uses it once; a seller who recognizes gain in slices can use it several times. Under section 453 an installment sale reports gain as payments arrive, so a note whose principal payments are sized to the room in the band can keep a modest seller at 0% for a long stretch. How an installment sale compares with an exchange covers the trade-offs, including the buyer's credit risk.

A partial section 1031 exchange works from the other direction. Section 1031(b) recognizes gain only to the extent of the money or other property you receive, so you can deliberately take cash out of the exchange equal to the room in the band and defer the rest. Taking boot on purpose walks through the sizing, and the order in which boot is taxed matters, because the depreciation layer is recognized before the appreciation.

Both routes depend on knowing your other income for the year before you close. Required minimum distributions, a spouse's wages or a Roth conversion in the same year will eat the band.

When the gain fits the band, paying the tax can beat an exchange

A seller whose whole gain fits inside the band has no federal tax to defer, and a section 1031 exchange would only carry a low basis forward for no benefit. Low-bracket sellers weighing tax against an exchange covers that decision, and whether a 1031 is worth it for a small gain sets a floor.

The answer changes when the gain is many times the band, when there is a large depreciation layer, or when state tax is significant, because a state taxes the gain on its own schedule and a federal 0% result does not carry over. Whether a 1031 defers state capital gains tax covers that side.

If the deferred portion of a partial exchange is going into a Delaware Statutory Trust, the identification and closing deadlines of section 1031(a)(3) still apply to it. Traditional DST solutions describe what that portion buys.