Investor Real Estate Accounts

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Capital Gains Tax on the Disposition of Residential Rentals

first posted: 2020-08-08 08:33:41.766457


If a property is held for less than a year, the capital gains are taxed as ordinary income. This can easily make you move to higher tax brackets as capital gains can be large.

If a property is held for more than a year, the tax rate is lowered, this is consistent with the government's view that long term investment is a good thing to be encouraged, whereas short term speculation is taxed more.

Tax rate for capital gains for single taxpayer are:

  • 0% below $39,375 total income
  • 15% below $434,550 total income
  • 20% over that

where total income is the sum of ordinary income and capital gains. Note that unlike income tax this is not a marginal tax rate, the relevant rate of 15% or 20% apply to the whole of the capital gains, causing some threshold effects.

The information required are :

  • Purchase price plus acquisition costs
  • Amortization expensed from purchase to sale of the asset
  • Sale price minus sales costs

The capital gains declaration is done in form 4797 and 1040 Schedule D for residential rentals.


This is my understanding but I am not a CPA, so you might want to check the following.

According to this CGT article, the difference between sale and purchase is subject to capital gains tax whereas the amortization is called "unrecaptured section 1250 amortization gains" and is subject to up to 25% tax. However, once you do your taxes or you check the filings of professional preparer, you don't see this 25% tax. This more specific article on section 1250 and other resources on the web explain that since 1986 tax reform only the excess amortization over the straight line amortization would cause section 1250 recapture.

In short, the 1/27.5 of the cost basis that can be deducted linearly every year is not taxed at 25% when selling but at the more advantageous 0% to 20% capital gains tax level above. Any accelerated depreciation beyond that such as that caused by seggregated depreciation of the various building components would cause unrecaptured gains subject to 25% tax when realising the capital gains.

Despite the 1986 simplification, the computation worksheet is complicated to ensure that someone in the lowest tax brackets would not be overcharged.


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