How is the gain on a building calculated?
Your taxable gain is roughly the sale price minus selling costs minus your adjusted basis — what you paid, plus capital improvements, minus the depreciation you've claimed. Because depreciation lowers your basis every year, long-held buildings often have far more taxable gain than owners expect, even if the price hasn't risen dramatically.
What is depreciation recapture?
The IRS lets you depreciate a rental building over 27.5 years, sheltering income along the way. When you sell, that claimed depreciation is "recaptured" and taxed — federally at up to 25% — separately from the rest of your gain. It applies whether or not you actually took the deduction, which is why a CPA review before selling matters.
How does a 1031 exchange defer these taxes?
Under Section 1031, you can roll the full proceeds into other investment real estate and defer both capital gains and recapture. The rules that trip owners up:
- 45 days from closing to identify replacement property in writing.
- 180 days from closing to complete the purchase.
- A qualified intermediary must hold the proceeds — if the money touches your account, the exchange fails.
- To defer all tax, the replacement generally needs equal or greater value and debt.
What if I just want out — not another property?
Then you pay the tax and move on with clean liquidity — which is sometimes the right call, especially for owners simplifying an estate or exiting management entirely. Others look at installment sales or Delaware Statutory Trust (DST) interests as middle paths. Each has real trade-offs; this is exactly the decision to price out with a CPA before you commit to a sale structure.
Planning an exit? Get a private offer you can build your tax plan around.
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Frequently asked questions
- What taxes apply when I sell an apartment building?
- Two main ones: capital gains tax on your profit above your adjusted basis, and depreciation recapture on the depreciation you've claimed over the years (recaptured at up to 25% federally). State taxes may also apply. Your actual liability depends on your basis, holding period, and situation — a CPA can run the exact numbers.
- What is a 1031 exchange in plain English?
- A 1031 exchange lets you sell an investment property and roll the proceeds into another investment property while deferring capital gains and depreciation recapture taxes. The money must go through a qualified intermediary — you can't touch the proceeds — and strict deadlines apply.
- What are the 1031 deadlines?
- From the day your sale closes, you have 45 days to identify replacement property in writing and 180 days to close on it. Both clocks run at the same time and there are no extensions for missing them, so owners planning an exchange should line up the intermediary before closing.
- Does selling off-market affect my taxes?
- No. The tax treatment is the same whether you sell privately or through a listing — taxes follow the gain, not the marketing method. A private sale can actually make 1031 planning easier because the closing date is more predictable.
- Can the sale timeline be set around my tax plan?
- Often, yes. A direct buyer can typically schedule closing to fit your tax year or 1031 window — one advantage of dealing with a single buyer instead of a public process.