Capital Gains Tax Explained: What Real Estate Professionals Need to Know When Selling a Property

Selling a property as a real estate professional isn’t just about closing deals…it’s also about understanding the tax implications. One of the biggest factors to consider is capital gains tax (CGT), which applies when you sell a property for more than its adjusted cost basis.

This guide breaks down how capital gains taxes work, how they affect your real estate sales, and strategies to minimize your tax burden so you can keep more of your hard-earned profits.

What Is Capital Gains Tax?

Capital gains tax is applied to the profit you make when selling an investment property, rental home, or even your primary residence in some cases. The taxable gain is determined by subtracting the adjusted cost basis (purchase price + improvements - depreciation) from the final sale price.

As a real estate professional, you may face capital gains taxes on personal property sales and transactions for clients, making it crucial to understand the rules and tax-saving strategies.

Short-Term vs. Long-Term Capital Gains Tax

The IRS categorizes capital gains into two types, based on how long you’ve held the property before selling:

1. Short-Term Capital Gains

Applies if you sell a property within 1 year of purchase

Taxed as ordinary income (10% to 37%, based on your tax bracket)

This is typically the least favorable tax treatment

2. Long-Term Capital Gains

Applies if you hold the property for more than 1 year before selling

Taxed at a lower preferential rate of 0%, 15%, or 20%, depending on taxable income

Why This Matters for Real Estate Pros:
If you flip properties, you’re likely dealing with short-term gains, meaning a higher tax bill. Holding onto a property for over a year can lead to significant tax savings. 

Capital Gains Tax on Investment & Rental Properties

If you’re selling a rental or investment property, different tax rules apply compared to selling a primary residence.

• No $250K/$500K Exemption: Unlike a primary residence, rental properties don’t qualify for the capital gains tax exclusion.

• Depreciation Recapture: If you claimed depreciation deductions while owning the property, you must “recapture” that amount upon selling. Depreciation recapture is taxed at a maximum rate of 25%.

• 1031 Exchange Opportunity: You may be able to defer capital gains taxes by reinvesting the proceeds into another property of equal or greater value.

Key Takeaway for Real Estate Investors:
If you're selling a rental or investment property, factor in depreciation recapture and potential tax savings strategies like a 1031 exchange.

How to Reduce Capital Gains Taxes on Real Estate Sales

As a real estate professional, you can help yourself (and your clients) save on taxes using these strategies:

✅ Use the Primary Residence Exclusion
If the property was your primary home for at least 2 of the last 5 years, you may exclude:

Up to $250,000 (Single filers)

Up to $500,000 (Married filing jointly)

✅ Hold the Property for More Than One Year
Avoid short-term capital gains taxes by holding properties for at least 12 months before selling.

✅ Leverage a 1031 Exchange
A 1031 exchange allows you to reinvest profits into a similar property without paying capital gains taxes immediately. However, strict rules and timelines apply.

✅ Increase the Cost Basis
Keep records of renovations, closing costs, and fees to adjust your cost basis higher, reducing taxable gains.

✅ Offset Gains with Losses
Use tax-loss harvesting by selling underperforming investments to offset real estate capital gains.

Smart Tax Planning = More Profit in Your Pocket!
By strategically timing your sales and leveraging available deductions, you can significantly lower your tax bill and maximize profits. 

Final Thoughts

As a real estate professional, understanding capital gains tax is just as important as knowing the market. Whether you’re selling your own investment property or advising clients, being informed helps you:

✅ Reduce taxes on your sales
✅ Optimize investment strategies
✅ Avoid common tax pitfalls

Since tax laws are complex and subject to change, consulting with a tax professional is always a smart move to ensure compliance and tax savings.