If you own real estate that you’ve held for over a year and sell it at a profit, you’ll likely owe taxes. This also could be true if you own real estate indirectly through an LLC, partnership, or S corporation. You might expect to pay the standard 15% or 20% federal tax rate for long-term capital gains (for assets held more than one year). However, due to depreciation, some gains may be taxed at higher rates. Here’s a breakdown:
Vacant Land
If you sell vacant land, the maximum long-term capital gains tax rate is 20%, but this only affects higher-income earners. For 2024, the 20% rate applies if your income (including the land sale gain and other long-term capital gains) exceeds:
$518,900 for single filers
$583,750 for married couples filing jointly
$551,350 for heads of household
If your income is below these limits, the tax rate will be 15%. However, you may also owe a 3.8% net investment income tax (NIIT) on the gain. The 3.8% NIIT applies to investment income, including capital gains from real estate sales, dividends, interest, and rental income, and is applicable when your modified adjusted gross income (MAGI) exceeds certain thresholds:
$200,000 for single filers
$250,000 for married couples filing jointly
$125,000 for married couples filing separately
Gains from Depreciation
If your real estate has depreciated in value and you sell it, some of the gain (called "unrecaptured Section 1250 gain") is taxed at a flat 25% federal rate – in addition to the 3.8% NIIT you may owe.
Qualified Improvement Property (QIP)
QIP includes improvements made to the inside of a commercial building. When you sell QIP and have claimed certain depreciation deductions, part of the gain (up to the amount you claimed) is taxed as ordinary income, meaning it’s taxed at your regular income tax rate. You may also owe the 3.8% NIIT on this gain.
Tax Planning Tip
If you use straight-line depreciation for real estate (including QIP), you won’t face higher taxes from depreciation recapture. Instead, your gain will be taxed at a rate of up to 25%, plus the 3.8% NIIT.
Key Takeaway
Real estate taxes can get complicated, with different tax rates applying to various types of gains. You may also need to account for the 3.8% NIIT and state taxes. We’ll handle the details when preparing your tax return, but feel free to reach out if you have questions about your specific situation.