Gain or loss is usually realized when a real estate property is sold or exchanged. A gain is the amount realized from a sale or exchange of property when the property is sold for more than its adjusted basis. A loss occurs when the amount realized from the sale or exchange is less than its adjusted basis.
If the property is held for more than one year (a year-and-a-day) before being sold, the gain on the sale will be taxed at long-term capital gains rates. Real estate held for less than one year is taxed at the short-term rate, which is the ordinary income tax rates. The long-term capital gains tax rates for the year 2020 are shown below:
To calculate the capital gain, divide the gain into two categories: (1) gain attributable to depreciation; and (2) gain attributable to appreciation. Any gain attributable to depreciation is taxed at a flat rate of 25 percent. Any gain attributable to appreciation is taxed at the capital gain rate shown above, assuming the property is held for longer than a year. There may also be additional capital gain taxes due depending on the state in which you live.
To defer all taxes from the sale of a property, which would include both depreciation recapture taxes and capital gain taxes, you might consider doing a 1031 Tax-deferred exchange.
