Your Estimated Tax
| Adjusted basis | — |
| §121 home-sale exclusion | — |
| Depreciation recapture (25%) | — |
| Federal capital gains | — |
| Net Investment Income Tax (3.8%) | — |
| State tax | — |
| Total estimated tax | — |
| Effective rate on the gain | — |
This is an educational estimate, not tax advice. It uses current federal long-term and ordinary
brackets, the 3.8% Net Investment Income Tax thresholds, the 25% ceiling on unrecaptured §1250 gain,
and a single flat top rate for state income tax. It does not model the alternative minimum tax,
suspended passive losses, instalment sales, partial-year residency, local income taxes, or
state-specific treatment of capital gains. In Primary Home mode it assumes the
property was never rented and never carried a home-office deduction — if you converted a rental to
a residence, or claimed depreciation on part of the home, that depreciation is still recaptured and
the §121 exclusion does not cover it. Individual circumstances vary — confirm your own numbers with
your tax and legal advisers before acting.
Why a Property Sale Is Not a Simple Capital Gain
On a share of stock the arithmetic is short: sale price minus what you paid. Real estate has
three complications that change the answer materially, and a general capital gains calculator
will not catch any of them.
- Your basis moved while you owned the property. Capital improvements — a new roof, an
addition, a full kitchen — raise it. Depreciation lowers it. After twenty years of ownership
the number you paid and the number the tax code says it cost you can be very far apart.
- Depreciation is taxed back at a different rate. Gain attributable to depreciation you
claimed is unrecaptured §1250 gain, taxed at up to 25% — not at the 15% or 20%
long-term rate that applies to the rest. It is taxed first, off the top.
- Selling costs come out before the gain is measured. Commission, title, and closing costs
reduce the amount realised, which is why they belong in the calculation rather than being
treated as a separate expense afterwards.
Put together, an owner who expects to pay “15% on the profit” on a long-held rental routinely
finds the effective rate on the gain is materially higher once recapture, NIIT and state tax
are counted.
A Worked Example
Take a rental bought for $350,000, improved by $40,000, depreciated by $150,000 over
the holding period, and sold for $900,000 with $54,000 of selling costs. Those are the
figures the calculator above loads by default, so you can see each step:
- Adjusted basis = $350,000 + $40,000 − $150,000 = $240,000
- Net proceeds = $900,000 − $54,000 = $846,000
- Total gain = $846,000 − $240,000 = $606,000
That gain then splits. The $150,000 of depreciation is recaptured at up to 25%; the remaining
$456,000 is taxed at the long-term rate set by total taxable income; the 3.8% NIIT applies to
the extent modified adjusted gross income exceeds the threshold; and state tax, if any, applies to
the whole taxable gain. Change the state in the calculator to see how much of the result is
geography rather than arithmetic.
Primary Residence vs Investment Property
Switch the calculator to Primary Home and the picture changes. Under §121, gain on a home
that was your main residence for at least two of the last five years can generally be excluded up
to $250,000, or $500,000 for a married couple filing jointly. Gain above the exclusion is
taxed as a long-term capital gain in the normal way.
Investment property does not qualify for that exclusion. This is the single largest fork in the
calculation, and it is why the tool asks which one you are selling before anything else.
If the Tax Result Is Larger Than Expected
There are recognised approaches for deferring or reducing tax on a property sale, and which — if
any — is appropriate depends entirely on your circumstances:
- 1031 exchange — defer the gain by reinvesting the proceeds in
like-kind investment property within the statutory deadlines.
- Opportunity Zone funds — defer and potentially reduce tax by
reinvesting the gain into a qualified fund.
- Instalment sale — spread the gain, and therefore the tax, across more than one tax year.
- Timing — the long-term rate depends on total taxable income in the year of sale, so the year
in which a sale closes can matter.
These are categories of strategy, described here for education. None is a recommendation, none
suits every investor, and each carries its own risks, costs and eligibility requirements.
Grace Capital Management, LLC is an SEC Registered Investment Adviser. Securities offered through
Concorde Investment Services, LLC, member FINRA/SIPC — separate and unaffiliated entities. This
page is educational and is not investment, tax, or legal advice. Tax rules change and individual
circumstances vary; confirm any figure with your own tax and legal advisers.
