Guides

Capital Gains Tax on Investment Property

Investment property covers a wider range of assets than a single family rental, including raw land, commercial buildings, multifamily communities, and net leased retail or industrial assets, and the capital gains calculation generally works the same way across all of them. Adjusted basis generally equals the original purchase price plus capital improvements, minus depreciation claimed on any depreciable component of the asset, since raw land itself is generally not depreciable while the buildings on it generally are. Gain on the sale is the difference between the net sale price and this adjusted basis, and if the investment property was held longer than one year, the gain generally qualifies for long term federal capital gains rates of zero, fifteen, or twenty percent, with any depreciation recapture on improved property generally taxed separately at a federal rate of up to twenty five percent. The net investment income tax of three and eight tenths percent generally applies on top of these rates for higher income sellers. California generally taxes the entire gain, including any recapture portion, as ordinary income under its own progressive bracket structure that tops out near thirteen point three percent, with an additional one percent surcharge on taxable income above one million dollars, so San Diego, CA investors selling a large commercial or multifamily asset should model the state liability carefully rather than assuming federal capital gains treatment applies at the state level. Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 like kind exchange treatment has generally been limited to real property held for investment or use in a trade or business, and personal property exchanges no longer qualify. This means land, commercial buildings, multifamily property, and most other classes of investment real estate are generally eligible to exchange into one another, regardless of asset type, as long as both the relinquished and replacement property are held for investment or business purposes rather than personal use. A San Diego, CA investor selling raw land can generally exchange into an income producing net leased building, and an investor selling an aging multifamily property can generally exchange into industrial or medical office real estate, since the like kind standard for real property is broad. We help investors map out how a sale of any qualifying investment property type could be structured as a deferred exchange, coordinating with the Qualified Intermediary, lender, and tax advisor throughout the identification and closing windows. Educational content only. This is not tax, legal, or investment advice, and investment property owners should work with a qualified tax professional to confirm their specific basis and gain calculation before any sale.