Taxes on selling rental property: Guide for US citizens

When selling your primary home, you'll walk away with little to no tax burden in most cases. But rental properties are a different situation. When you sell an investment property, the IRS expects its cut, and your tax bill can climb quickly.

Many American property owners are also caught off guard when they realize that their foreign rentals trigger US tax obligations, too. If you own a rental property in another country, you'll still need to report the sale and pay taxes on any profit to the IRS.

That said, smart strategies exist to shrink your taxes on selling a rental property and help you keep more money in your pocket. Here's what American property owners need to know.

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Table of contents
What types of taxes are there when selling a rental property? Example of taxes when selling a rental property What to consider when selling a rental property

What types of taxes are there when selling a rental property?

The 2 main types of taxes when selling rental property are the capital gains tax and depreciation recapture. For both, the amount you pay hinges on how long you've held the property and your current income bracket.

Short-term capital gains tax

If you sell your rental property within a year of buying it, the IRS will treat your profit like regular income.

This means that the same tax rates apply to your gain as they do to your paycheck—anywhere from 10% to 37%, depending on where you land in the federal tax brackets.¹

For example, say you're a single filer earning 210,000 USD annually, which places you in the 32% bracket. You sell your rental property after 6 months of owning it, and walk away with 40,000 USD in profit. The extra 40,000 USD gets added to your existing income.

Now your total income is 250,000 USD, which bumps you into the 35% bracket.

Long-term capital gains tax

If you hold your property for more than a year before selling, you'll qualify for long-term capital gains tax rates. These are much lower than short-term rates.

You'll pay 0%, 15%, or 20%, based on your taxable income.²

With the long-term capital gains tax, a 40,000 USD profit from your rental property sale would likely be charged at the 15% rate. In other words, qualifying for long-term capital gains tax rates will likely save you a lot of money.

Depreciation recapture tax

Rental property owners can deduct depreciation each year that they own the property. This is a tax break that reduces your annual taxable income.

The IRS lets you write off the property's value (minus land) over 27.5 years for residential rentals.³ This will save you money during ownership, but the IRS will want some of that back when you sell.

Depreciation recapture taxes you on all the depreciation deductions you claimed over the years. This portion of your gain gets taxed as ordinary income based on your tax bracket.

Selling a foreign rental property

Do you own a rental property abroad? The fact that your property isn't located in the US doesn't exempt you from US taxes. American citizens and residents report their worldwide income to the IRS, and that includes profits from selling overseas property.

You'll calculate your gain the same way you would for a domestic rental, factoring in your purchase price, improvements, and applicable deductions.

However, most countries tax real estate sales within their borders, which means that you might pay local taxes first. In this case, you'll likely be able to claim the Foreign Tax Credit to offset some or all of what you paid abroad against your US tax bill.

For example, if you paid 8,000 USD in Portuguese taxes on your sale and owe 10,000 USD to the IRS, the credit reduces your US obligation to 2,000 USD.

Example of taxes when selling a rental property

Let's walk through a possible scenario:

You bought a rental property 5 years ago for 180,000 USD. The land was valued at 30,000 USD, which means that the building itself was worth 150,000 USD. Over the 5 years, you deducted 27,273 USD in depreciation on your tax returns. Now you're selling the property for 250,000 USD.

First, you need to figure out your adjusted basis.

Start with your original purchase price of 180,000 USD and subtract the 27,273 USD in depreciation that you already claimed. Your adjusted basis is now 152,727 USD.

Next, calculate your total gain.

You sold for 250,000 USD, minus your adjusted basis of 152,727 USD. That's a 97,273 USD gain.

The IRS splits this gain into 2 pieces. The 27,273 USD in depreciation you claimed gets taxed as ordinary income. Let's say you're in the 24% bracket, so that's 6,545 USD. The remaining 70,000 USD in profit gets taxed as a long-term capital gain at 15%, which equals 10,500 USD.

Your total tax bill: 17,045 USD.

That's before factoring in any selling costs like real estate commissions, legal fees, or repair expenses you paid to get the property ready for sale.

What to consider when selling a rental property

Here are a few factors that can impact your final tax bill and overall profit:

• Timing of the sale: Holding your property for at least a year qualifies you for lower long-term capital gains rates instead of short-term rates that match your income bracket
• Selling costs are deductible: Real estate commissions, attorney fees, title insurance, and advertising expenses all reduce your taxable gain
• Document your improvements: Major upgrades like a new roof, HVAC system, or kitchen remodel increase your cost basis and lower your gain
• Consider your income year: If you're between jobs or taking a sabbatical, selling in a lower-income year could drop you into a lower tax bracket
• State taxes: Some states don't have capital gains taxes, and others tax them as regular income, so factor this into your planning
• Foreign property paperwork: Selling overseas rental property requires additional forms and careful tracking of the foreign taxes you pay to claim US credits

Your main consideration will be paying capital gains tax, so it's worth coming up with a strategy on how to reduce it long before you plan to list your property for sale.

In the meantime, learn how rental yield is calculated to make the most out of your investment property while you own it.

How to lower taxes on rental property sales

Hold the property for over a year

You can minimize capital gains taxes by selling your property after owning it for more than a year. This way, your profit will qualify for long-term capital gains rates, which top out at 20%.²

For someone in the 32% bracket selling a property with a 60,000 USD gain, waiting just a few extra months could save over 10,000 USD in taxes.

To run your property better and make more income while you own it, try these top 10 rental property management software.

Make it your primary residence

If you live in your rental property for at least 2 of the 5 years before selling, you can exclude up to 250,000 USD in profit from taxes if you're single, or 500,000 USD if you're married filing jointly.⁴

You'll need to live at your property, which means you won't be able to earn rental income, but it can wipe out your entire tax bill. So, it’s a trade-off.

Use a 1031 exchange

A 1031 exchange lets you roll your profits into another investment property and defer capital gains taxes indefinitely. However, this is usually only a good idea if you had already been planning on buying another rental property.

You'll need to identify your replacement property within 45 days of selling and close on it within 180 days.⁴ The new property must be equal to or greater in value, and you'll need a qualified intermediary to handle the funds for business or investment purposes.

Offset gains with losses

If you sold stocks, mutual funds, or other investments at a loss during the same tax year, you can use those losses to cancel out your rental property gains. This is called tax-loss harvesting.

For example, you can sell an underperforming asset for a 20,000 USD loss and a rental for a 50,000 USD gain, and you'll only pay taxes on 30,000 USD.

Sell during a low-income year

Capital gains tax rates depend on your total taxable income. If you're between jobs, taking a career break, or retiring, these are often the ideal times to sell a rental property.

A lower income year could drop you into a lower capital gains bracket, potentially even the 0% rate if your income is low enough.

Maximize your deductions

Everything you add to your property's cost basis reduces your taxable gain. This is why it's important to keep receipts for major improvements like roof replacements, new appliances, or renovations.

Selling costs like real estate commissions, legal fees, and staging expenses also reduce your gain.

Use the Foreign Tax Credit

If you sold a rental in another country, you might not owe anything to the IRS if you already paid local taxes where the property was located.

The Foreign Tax Credit lets you subtract what you paid to foreign governments from your US tax bill, so if you paid 12,000 USD in Mexican taxes on your sale and owe 12,000 USD to the IRS, the credit eliminates your US obligation.

You'll need to file Form 1116 with your return and keep detailed records of all foreign tax payments, and it can also be worth looking into with a qualified tax advisor.⁵

Frequently asked questions

Do I have to pay taxes if I sell my rental property at a loss?

No, you don't owe capital gains taxes on a loss. In fact, you can use that loss to offset other investment gains during the same tax year.

How long do I need to live in my rental property to avoid capital gains taxes?

You must live in the property as your primary residence for at least 2 out of the 5 years before selling. This qualifies you for the capital gains exclusion, which is up to 250,000 USD for single filers and 500,000 USD for married couples filing jointly.⁴

The 2 years don't need to be consecutive, but they must fall within the 5-year window.

What happens if I sell a rental property I inherited?

Inherited properties get a "step-up in basis," which means that your cost basis adjusts to the property's fair market value on the date the previous owner died.

If you inherit a rental worth 300,000 USD and sell it a year later for 310,000 USD, you only pay capital gains on the 10,000 USD difference. You don’t pay anything on the appreciation during the previous owner's lifetime.

Bottom line

Rental property sales trigger tax obligations, and your main worry will be the capital gains tax. Luckily, there are ways to reduce your tax liability, including holding your property for over a year to access lower long-term rates.

You can also convert your rental property into your primary residence, use a 1031 exchange, time your sale strategically, and maximize deductions to pay less in taxes.

Foreign rental properties follow the same rules, but you'll likely be able to use the Foreign Tax Credit to reduce what you owe the IRS, sometimes to zero. It’s highly recommended to work with a knowledgeable tax professional to take advantage of this credit.

Now, here’s a consideration that many property owners forget about.

If you're selling a rental property abroad, you'll need to move money between countries. Unfortunately, banks hit you with steep transfer fees and unfavorable exchange rates that eat into your profits.

So, it's smart to research alternatives.

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Sources

1. IRS - Federal income tax rates and brackets
2. IRS - Topic no. 409, Capital gains and losses
3. Stessa - How Much Tax Do You Pay When You Sell a Rental Property?
4. Investopedia - How to Prevent a Tax Hit When Selling a Rental Property
5. IRS - Foreign Tax Credit

Sources checked 12/08/2025