What the Tax Bill Actually Looks Like When You Sell an STR

The exit tax isn't one number — it's an assembly line

Ask what the tax will be on a sale and you will usually get a single percentage back. That answer is wrong before it starts, because the tax on disposing of a short-term rental is not a rate applied to a number. It is a sequence: a figure at the top, a subtraction, a split into pieces, and a different layer applied to each piece. The steps below are that sequence, in order, and the order is the part that does not change.

This is educational information about how a disposition is computed, not individualized tax advice. Your actual result depends on your facts, your records and your allocation, and should be confirmed with your own qualified tax professional. The worked example below is an illustrative model, not a projection or a recommendation.

Step 1 — Amount realized

Start with what the sale actually brings in. Amount realized starts with the consideration received — money plus the fair market value of any property — and it can include liabilities the buyer assumes or takes the property subject to (§1001(b)). Selling expenses such as commissions and closing costs reduce the amount used to measure gain.

One trap to avoid: your own loan payoff is not a second add-on. When the buyer pays a price and escrow uses part of it to pay off your mortgage, that payoff affects the cash you walk away with — it does not get added to amount realized a second time, and it does not reduce your taxable gain. Buyer-assumed debt is different: that is part of the consideration.

The result is the top of the assembly line — not your profit yet.

Step 2 — Adjusted basis, brought in from the basis page

Subtract the number the basis page is about. Your adjusted basis is your cost, raised by capital improvements and lowered by depreciation allowed or allowable over the hold — the running ledger the Adjusted Basis guide owns. Bring that number here; this page does not rebuild it.

The one thing to carry over: because depreciation lowered your basis year after year, your basis at sale is usually well below what you paid — which is exactly why the gain is larger than "what it went up in value."

Step 3 — Realized gain, and a note on timing

Realized gain is amount realized minus adjusted basis (§1001(a)). On a conventional sale, that gain is generally recognized — taxed — in the year of sale (§1001(c)).

One caveat worth naming rather than teaching here: recognition timing can differ by transaction structure. A qualifying 1031 exchange defers recognition, and a qualifying installment sale can spread some gain as payments are received — but depreciation-recapture ordinary income generally has separate rules and is recognized in the year of sale even on an installment sale. This page models a conventional, fully taxable sale; those alternatives are separate planning questions, and installment mechanics stay off this page.

Step 4 — Characterize the gain: possible layers, applied as relevant

This is the step everyone skips, and it is where the money is. Your realized gain is not taxed as one thing — it can pass through several characterization layers, applied as relevant rather than as a guaranteed waterfall where every sale has every piece. The character rules themselves belong to the Depreciation Recapture guide; here we assemble them in the correct order, and the order matters, because recapture comes out first and only what is left enters §1231.

• 1. Identify any ordinary-income depreciation recapture first. §1245 depreciation — on the shorter-life components a cost-segregation study may have created — comes back as ordinary income to the extent of that depreciation, capped at the gain. §1250 ordinary recapture applies only to depreciation taken above straight-line, so for modern straight-line real property it is usually zero. (Land improvements are the exception worth naming: they are §1250 property but are depreciated on an accelerated method and are often bonus-eligible, so unlike the building they can carry additional depreciation. The recapture guide covers why.) These ordinary pieces are pulled out before anything else.
• 2. Put the remaining eligible business-property gain into the §1231 netting process. Only the gain in excess of that recapture enters §1231, where your net §1231 position for the year is determined: a net §1231 gain can receive long-term capital-gain treatment, while a net §1231 loss is ordinary.
• 3. Apply the five-year lookback where relevant. §1231(c) can pull some of a current net §1231 gain back to ordinary income to the extent you deducted nonrecaptured §1231 losses in the preceding five years — so "§1231 gain = capital gain" holds only after that lookback is cleared.
• 4. Determine the resulting long-term capital-gain components, including any unrecaptured §1250 gain. Within that resulting capital-gain picture, the part attributable to straight-line depreciation on the building is unrecaptured §1250 gain. Read the label carefully: despite the "§1250," it is not another recapture bucket — it is a special category within the long-term capital gain, carrying its own maximum rate rather than the general long-term rate.

The arithmetic check that keeps this honest: the pieces have to sum back to the realized gain from Step 3. If your ordinary recapture, unrecaptured §1250 gain and remaining long-term capital gain do not add up to the gain, a piece is mislabeled. The worked example below reconciles exactly, on purpose.

Step 5 — Apply the tax layers

Each piece now meets its own rate, and there are up to three more layers on top.

• Ordinary rates on the §1245 — and any §1250 — ordinary-income pieces.
• The unrecaptured-§1250 maximum rate on that capital-gain category. It is a ceiling applied to that slice, not a flat charge on it.
• Long-term capital-gain rates on the remaining §1231 / LTCG piece.
• Net Investment Income Tax, a separate 3.8% layer with its own analysis. Gain from a disposition can enter net investment income, but whether it is excluded can depend on both whether the property was held in a qualifying §162 trade or business and whether that business was non-passive to you — so non-passive status by itself does not necessarily remove the gain from NIIT. Material participation is an important input, not a universal "no-NIIT" switch. Use the Tax guides for the upstream classification and participation facts (classification, material participation and the passive-activity rules); apply the §1411 rules separately here, once those facts are known.
• State income tax, a separate and potentially material layer that varies by jurisdiction. It can meaningfully change your after-tax proceeds; model it separately with your advisor. This page does not estimate a state rate.

The actual percentages and thresholds for these layers are current law. They live in the dated panel below, not in this evergreen description.

Step 6 — After-tax proceeds

What is actually left is your cash from the sale: net sale proceeds after selling costs, minus the debt you pay off, reduced by the total tax across the layers above. Selling expenses have already come out at Step 1 — they reduce the amount used to measure gain — so they are not subtracted a second time here.

That last number is the one that should drive any comparison against keeping or exchanging the property, which is the sell-versus-1031-versus-refinance decision's job. The assembly line's whole purpose is to get you an honest after-tax figure instead of a single-rate guess.

The rates for each layer — current law as of September 2026

This is the dated part of the page. The assembly order above is evergreen; the percentages below are current U.S. federal law and can change. Confirm them before relying on them.

• §1245 / §1250 ordinary-income pieces: taxed at your ordinary income tax rates — your marginal bracket.
• Unrecaptured §1250 gain: long-term capital gain at a maximum rate of 25%.
• Remaining long-term capital gain (§1231): the long-term capital-gain rates — 0%, 15% or 20% depending on taxable income.
• NIIT: 3.8% on the lesser of net investment income or the amount by which MAGI exceeds the applicable threshold — $200,000 single or head of household, $250,000 married filing jointly. These thresholds are set by statute and are not inflation-indexed.
• State income tax: varies by state, and is not included here.

These figures are current federal law as of September 2026. The assembly order in the body does not change; only these numbers do. Confirm the current rates and thresholds with your tax professional.

A worked example — illustrative, every figure traceable

An illustrative sale, in round numbers, on one simplified fact pattern. This is not your result.

You bought an STR for $500,000, with $100,000 allocated to non-depreciable land. You made no capital improvements, and over the hold you took $110,000 of depreciation — $80,000 straight-line on the building (§1250) and $30,000 on cost-segregated §1245 components. You sell for a price that nets $650,000 after selling expenses, and you have a $250,000 mortgage that escrow pays off at closing.

Reconciliation A — the tax: character buckets must sum to the realized gain

• Net amount realized, after selling expenses: $650,000
• Adjusted basis = $500,000 cost − $110,000 depreciation = $390,000
• Realized gain = $650,000 − $390,000 = $260,000

Allocate, then characterize — asset by asset, not inferred from depreciation alone. A sale of land plus §1250 building plus §1245 components requires the sale price to be allocated among the assets, gain determined for each, and the character rules applied to each; §1245 recapture is bounded by the gain on those specific assets. Under the allocation assumed below, the $260,000 gain characterizes as four pieces.

• §1245 ordinary-income recapture: $30,000
• §1250 ordinary recapture: $0 (straight-line building)
• Unrecaptured §1250 gain: $80,000
• Remaining §1231 / long-term capital gain: $150,000

Check: $30,000 + $0 + $80,000 + $150,000 = $260,000 ✓ — it reconciles to the realized gain.

Illustrative assumptions for the tax layer

Chosen to make the arithmetic auditable, not to hit a target total.

• The sale-price allocation among the land, §1250 building and §1245 components produces sufficient gain on the §1245 assets for the full $30,000 of prior §1245 depreciation to be ordinary-income recapture, and sufficient qualifying gain on the §1250 property for the $80,000 of unrecaptured §1250 gain shown. Actual sales require asset-level allocation and characterization — these buckets are assumed outputs of that allocation, not mechanically inferred from the depreciation history.
• Held long-term, with no prior nonrecaptured §1231 losses affecting the $150,000.
• The property was held as a passive investment, so the entire recognized gain is included in net investment income, and MAGI exceeds the NIIT threshold by at least the gain.
• Assumed ordinary marginal rate 32%; assumed long-term capital-gain rate 15%.
• Unrecaptured §1250 gain at the 25% maximum, per the dated rates above.
• State tax omitted, and named separately below.

Apply the layers — each line independent

• §1245 ordinary: $30,000 × 32% = $9,600
• Unrecaptured §1250: $80,000 × 25% = $20,000
• Long-term capital gain: $150,000 × 15% = $22,500
• NIIT: $260,000 × 3.8% = $9,880

Illustrative federal tax estimate under the stated assumptions = $9,600 + $20,000 + $22,500 + $9,880 = $61,980, plus any state tax.

Reconciliation B — the cash: what you actually walk away with

This is a different calculation from the gain. The mortgage payoff reduces your cash but not your taxable gain.

• Net sale proceeds, equal to net amount realized after selling expenses: $650,000
• Less seller mortgage payoff: $250,000 → $400,000 cash at closing
• Less illustrative federal tax estimate: $61,980
• ≈ $338,020 approximate cash retained, before state tax and other closing adjustments

Every number is illustrative and rounded to show the assembly. Change any assumption and the totals change. The point is the two reconciliations — the buckets sum to the gain, and cash equals sale minus debt minus tax — not this specific dollar figure.

Reducing or deferring it, honestly

Because the tax is real, "how do I avoid it?" is the natural next question — and the honest answer is usually defer, not avoid. The legitimate levers, each owned by its own page:

• Exchange instead of sell. A qualifying 1031 exchange defers the gain by carrying your basis into the replacement property. Deferral, not forgiveness.
• Spread the recognition. A qualifying installment sale can recognize some eligible gain as payments arrive, though depreciation-recapture ordinary income generally must still be recognized in the year of sale. The mechanics — gross-profit ratio, the recapture rule, seller-financing interest — are outside this page and belong to the installment-sale guide.
• Hold to a step-up. Basis is generally stepped up at death (§1014), which is the one point the deferred gain can actually be extinguished. The Step-Up in Basis guide covers the bounded reality of that, which is not a "1031 until you die and taxes vanish" guarantee.

Which of these makes sense — or whether to just sell and pay — is the Sell / 1031 / Refinance decision. This page only tells you what the bill is, so that decision has an honest number to work with.

The assembly, in one line

The exit tax is several taxes stacked in order, not one rate. Amount realized minus basis is the gain; the gain is split into ordinary-income pieces, a capped-rate capital category — unrecaptured §1250 gain, not "recapture" — and long-term capital gain; then NIIT and state can add layers. Assemble it in order and the pieces reconcile to the gain. That is how you get a real after-tax number instead of a single-rate guess. This page assembles the doctrine the adjusted-basis and depreciation-recapture guides teach.