If you’re a landlord thinking about selling your rental property, it’s important to understand the tax bill that could be waiting for you on the other side of the sale. Selling a rental isn’t the same as selling your personal home—it comes with its own set of tax rules, especially if you’ve claimed depreciation or made money on the sale.
Don’t worry—we’re not here to drown you in IRS jargon. This guide will walk you through the key tax implications of selling a rental property in a simple, conversational way so you can make informed decisions, avoid surprises, and walk away with as much of your hard-earned equity as possible.
1. Capital Gains Tax
Let’s start with the big one: capital gains tax. If your property has gone up in value since you bought it, you may owe taxes on the profit.
Capital gain = Selling price - Adjusted basis.
Your adjusted basis is what you paid for the property, plus major improvements, minus depreciation.
There are two types:
- Short-term capital gains: If you’ve owned the property for less than a year, you’ll be taxed at your ordinary income rate.
- Long-term capital gains: If you’ve owned it for more than a year, you’ll likely pay 15% or 20% depending on your income level.
💡 Example: You bought a rental in El Paso 10 years ago for $150K, made $20K in improvements, and now you’re selling it for $250K. You’d have a $100K capital gain (minus depreciation, which we’ll cover next).
2. Depreciation Recapture
Here’s the part that catches a lot of landlords off guard: depreciation recapture.
When you own a rental, you’re allowed to deduct depreciation on your taxes each year (even if the property is going up in value). But when you sell, the IRS wants to “recapture” those deductions.
- You’ll be taxed up to 25% on the total depreciation you claimed (or could have claimed).
💡 Example: If you depreciated $50,000 over the years, you could owe $12,500 in depreciation recapture tax, even if you didn’t make a profit on the sale.
3. 1031 Exchange: Deferring Taxes
If you don’t want to pay those taxes right now, a 1031 exchange could be your ticket.
This allows you to sell one investment property and use the proceeds to buy another—without paying taxes on the gain (yet).
To qualify, you must:
- Buy another like-kind investment property.
- Identify the new property within 45 days.
- Close on it within 180 days.
- Use a qualified intermediary to handle the exchange.
This strategy is great if you’re staying in the real estate game and want to build long-term wealth.
4. Primary Residence vs. Rental: What If It Was Both?
Did you ever live in the rental before turning it into an investment property? If so, there’s a chance you could qualify for a capital gains exclusion.
If you lived in the home for 2 out of the last 5 years, you may be able to exclude up to $250,000 in gain (or $500,000 if married filing jointly).
But—if you’ve rented it for too long, that exclusion might be reduced or eliminated. Talk to a tax pro if this situation applies to you.
5. What Expenses Can You Deduct?
Here’s some good news: You can deduct many of the costs associated with selling your rental, including:
- Realtor commissions
- Title and escrow fees
- Legal fees
- Advertising/marketing costs
- Final repairs made before the sale
These reduce your capital gain, which helps lower your tax bill.
6. State and Local Taxes in Texas
Texas has no state income tax, which means you don’t owe capital gains tax to the state. That’s a win.
But keep in mind:
- You’ll still owe federal taxes on gains and depreciation recapture.
- You may have some local closing costs or fees, depending on your city or county.
7. Tax Planning Tips Before You Sell
Here are a few smart moves to make before you list your property:
- Keep detailed records – Improvements, depreciation, and all selling expenses matter.
- Talk to a CPA or tax advisor – They can walk you through exact numbers and help you plan.
- Consider timing – Selling in a year when your income is lower might reduce your capital gains tax rate.
- Run the numbers early – That way, you know what to expect and can avoid surprises at tax time.
Final Thoughts
Selling a rental property in El Paso can be a smart financial move—but don’t let taxes catch you off guard. Between capital gains, depreciation recapture, and the option for a 1031 exchange, there’s a lot to think through.
If you’re ready to sell and want a simple, straightforward process, consider working with a reputable cash buyer who understands landlord situations and can close fast—so you can move forward with clarity and confidence.
