A Miami landlord who bought a duplex a decade ago for $280,000 and is selling it today for $650,000 is not just looking at tax on the $370,000 spread. Capital gains tax on rental property has two layers most owners underestimate until a closing statement puts a real number in front of them: the gain itself, taxed at capital gains rates, and depreciation recapture, taxed separately and generally at a higher rate. Both come due in the year of sale unless you defer them.
Rental property tax gets more complicated than a primary-residence sale precisely because you have been claiming depreciation against it every year you owned it, and the IRS wants that benefit back when you sell.
How the Gain Itself Gets Calculated
Your taxable gain is the sale price minus your adjusted basis, and adjusted basis is not simply what you paid. It is your purchase price plus qualifying capital improvements, minus the depreciation you have claimed over the years. That last subtraction is what trips people up, because it means your basis has been shrinking every year you owned the rental, which makes your taxable gain larger than a simple purchase-price-to-sale-price comparison would suggest.
Long-term capital gains rates apply if you held the property more than a year, which almost every rental owner has by the time they sell. Short-term gains, taxed as ordinary income, are rare in this context but do apply to a property flipped within twelve months.
Depreciation Recapture Is a Separate Bill
Every year you depreciated the rental, you lowered your taxable rental income, and that benefit gets recaptured at sale, generally at a 25 percent federal rate on the recaptured amount rather than standard capital gains rates. On a property held fifteen or twenty years, accumulated depreciation can be substantial, which means recapture alone can be a meaningful chunk of the total tax bill, separate from and in addition to the gain on appreciation.
State and Net Investment Income Tax Considerations
Florida has no state income tax, which is a real advantage for a Miami rental owner compared to selling the same property in a state that taxes capital gains separately. That said, the federal Net Investment Income Tax can still apply to rental gain above certain income thresholds, adding another 3.8 percent on top of the federal capital gains and recapture liability for higher-income sellers. It is worth running actual numbers with a CPA rather than assuming Florida's lack of state tax covers the whole exposure.
Deferring Both Layers With a 1031 Exchange
A Section 1031 exchange defers both the capital gains tax and the depreciation recapture, not just one or the other, as long as the sale proceeds go into a replacement property that is also held for investment or business use. The mechanics require a qualified intermediary handling the funds, a 45-day window to identify replacement property, and a 180-day window to close, all counted from the date the relinquished property sold. For a Miami owner rolling proceeds from one rental into a larger or better-located one, that deferral can be the difference between reinvesting the full sale price and reinvesting what is left after two separate tax bills.
Estimating the Bill Before You List
A rough estimate of both layers before signing a listing agreement saves a lot of surprise at closing. Pull your original purchase settlement statement, add up any capital improvements you have receipts for, and total the depreciation shown on your Schedule E filings across every year of ownership. That gives a working adjusted basis, and comparing it against a realistic sale price puts a real number on the gain, with the depreciation total doubling as the recapture exposure before any capital gains rate is applied.
Owners who run this exercise a few months ahead of listing, rather than after an offer is already on the table, have room to decide whether a 1031 exchange, an installment sale, or simply paying the tax makes the most sense for their situation, instead of scrambling to identify replacement property inside a 45-day window they were not expecting.
Common 1031 Exchange Questions
How is capital gains tax on rental property different from a home sale?
A rental does not qualify for the Section 121 home-sale exclusion, and it carries depreciation recapture on top of the standard capital gains tax, which a primary residence sale generally does not.
What rate applies to depreciation recapture?
Recaptured depreciation is generally taxed at a maximum federal rate of 25 percent, separately from the standard long-term capital gains rate applied to the rest of the gain.
Does Florida charge state capital gains tax on a rental sale?
No, Florida has no state income tax, so a rental sale here avoids the state-level capital gains tax that sellers in many other states face on the same transaction.
Can I avoid depreciation recapture with a 1031 exchange?
A 1031 exchange defers depreciation recapture along with the capital gains tax, provided the proceeds go into a qualifying replacement property under the exchange rules.
Does the Net Investment Income Tax apply to a rental property sale?
It can, for sellers above certain income thresholds, adding 3.8 percent on top of federal capital gains and recapture tax, which is worth confirming with a CPA before closing.
