Capital Gains Tax
Capital gains tax is the federal tax on profit from selling an asset like real estate; long-term gains are taxed at 0%, 15%, or 20% depending on income.
Definition
Capital gains tax is the tax you owe on the profit when you sell a capital asset for more than your adjusted basis. For real estate held more than a year, the gain is long-term and taxed at preferential federal rates of 0%, 15%, or 20% depending on taxable income. Assets held a year or less are taxed at ordinary income rates.
For real estate the picture is more layered. The portion of gain attributable to depreciation is unrecaptured Section 1250 gain, taxed at up to 25%. High earners may also owe the 3.8% Net Investment Income Tax, and most states add their own tax.
A $400,000 real estate gain could easily face a combined federal bill above $100,000. This is exactly what a 1031 exchange defers: by rolling proceeds into like-kind property, the investor postpones the capital gains tax and the depreciation recapture until a future sale, or potentially eliminates it through a step-up in basis at death.
Key points
- Long-term gains taxed at 0%, 15%, or 20% federally
- Short-term gains taxed as ordinary income
- Depreciation portion taxed at up to 25% (unrecaptured Section 1250)
- High earners may add the 3.8% Net Investment Income Tax
- Deferred by a 1031 exchange, eliminated by step-up at death
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.