Tax considerations when selling a short term rental

Short-Term & Vacation Rental Discussions
1yFollow

Tax considerations when selling a short term rental

Tom Rairdon
Investor · NH · Member since 2012 · 6 posts · 3 votes

Hello all,

Has anyone sold a short term rental owned over a year  as a non real estate professional that qualified as short term capital gains tax deductions with expenses and depreciation? Did the proceeds from the sale count as short term or long term capital gains? I’m in the 33% tax bracket through my real job and this could be a big difference in taxes owed if we sold the property? Thank you for any advice. 

2Reply
41 views

Most Popular Reply

Nathaniel QuesenberryBusiness Member
Accountant · Member since 2024 · 15 posts · 9 votes
1y

Tom, 

Based on what you've provided, if the property was held over one year, you'd be subject to the long term capital gains rates and any depreciation that you took on the property in the past would have to be "recaptured" (Added to your income) at the short term tax rates (but it will not exceed 25%). 

You'll want to check with your tax advisor of course though. 

3Reply
See this reply in the discussion

10 Replies

Jump to latestLatest
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    1y

    I beleive over a year is long term capital gains. Check with your CPA.

    1Reply
  • Nathaniel QuesenberryBusiness Member
    Accountant · Member since 2024 · 15 posts · 9 votes
    1y

    Tom, 

    Based on what you've provided, if the property was held over one year, you'd be subject to the long term capital gains rates and any depreciation that you took on the property in the past would have to be "recaptured" (Added to your income) at the short term tax rates (but it will not exceed 25%). 

    You'll want to check with your tax advisor of course though. 

    3Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    1y

    If it's over a year, you'll  be subject to long term capital gains at rates up to 20%. In addition, you'll have depreciation recapture at rates up to 25%. You'll want to get a tax estimate if you sold in 2024 so you can pay in the appropriate amount of tax (Assuming you didn't do a 1031 exchange).

    [email protected]
    Brick House CPAs53 Reviews
    WebsiteView Page
    2Reply
  • Patricia Andriolo-Bull
    Member since 2022 · 529 posts · 413 votes
    1y

    I sold two STRs in July and August 2023. I owned one for 13 years but it was a STR for only a couple of years prior and the other for 7 years and was always a STR. The only difference from your question is that I was a REP. I looked at my return for you, hope this helps but check with your own CPA.

    - Unrecaptured falls under section 1250 and is treated as ordinary gains and capped at 25%

    - My capital gain from appreciation and improvements under section 1231 was treated as a long term capital gain since I owned both assets over a year.

    Hope this helps.

    1Reply
  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    1y

    “Depreciation” is a wonderful tax benefit over the course of 27.5 years, but unfortunately, it isn’t a tax break per se, merely a deferment. 
    When you sell, Uncle Sam wants his cut.

    [email protected]806-672-7102
    SMOKY MOUNTAIN FALLS INC.51 Review
    WebsiteView Page
    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
    1y

    If you did a cost segregation study on the property in the past, you may have to recapture the depreciation taken in the past.

    capital gain tax rates are 0, 15 or 20%
    There is also a potential 3.8% Net Investment Income Tax.

    Also, don't forget state income taxes depending on what state the property is located or your state of residency.

    Best of luck!

    [email protected]917-280-8544
    Basit Siddiqi CPA4.880 Reviews
    View Page
    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Tom Rairdon If you've owned your short-term rental (STR) for over a year, it likely qualifies for long-term capital gains (LTCG) treatment, taxed at lower rates (0%-20%) compared to your 33% ordinary income bracket. Depreciation recapture applies at ordinary income rates capped at 25%, increasing your tax liability. You're taxed on the sales price less adjusted cost basis (basis less depreciation), not taxed on the proceeds from the sale. To reduce taxes, offset gains with selling expenses (e.g., commissions, fees) and consider a 1031 exchange to defer gains by reinvesting in another property.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®4.9242 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    2Reply
  • Daniel Osman
    Accountant · 1031 Exchange Qualified Intermediary | Nationwide · Member since 2024 · 53 posts · 32 votes
    1y

    I agree with @Ashish Acharya if you're interested in reinvesting the proceeds into another investment property and your goal is to minimize your tax liability a 1031 would work out well for you. It would allow you to sell your STR and defer all the taxes to reinvest all the proceeds into another property or multiple properties.

    If you have any questions on 1031's feel free to ask! 

    0Reply
  • Kyle Sneed
    Member since 2025 · 1 post · 0 votes
    1y

    As a W-2 employee, I have been working on using the STR tax strategy to purchase property out of state. I would meet 100 hour test and other requirements to become active. The market I'm looking in is in an area I may wish to live later in life (15+ years).

    Given the above, is anyone familiar with converting a STR into a 1) primary residence, 2) vacation home/second home no longer operating as STR or 3) passive investment property?

    Obviously the goal would be to avoid any type of depreciation recapture and retain as many tax benefits as possible.  Trying to think through this upfront and determine whether this is even possible.

    Any attorneys/CPAs out there familiar with any structures?  

    Thanks!

    0Reply
  • Stephen Nelson
    Accountant , CPA, MBA in Finance, MS in Taxation · Redmond, WA · Member since 2025 · 172 posts · 135 votes
    1y

    There would be zero issue with your STR going "long-term"... actually, you might see a property swing between short-term and not short-term just because the average rental interval is wobbling between 7 days and 8 days. (7 days or less? STR. 8 days? Not STR.)

    Regarding converting a STR or a LTR to a residence or to a vacation home or even just a Section 280A "mixed use dwelling"... it depends.

    For a full conversion, there's rev proc for converting like-kind exchange replacement properties, Microsoft Word - Rev Proc 2008-16.doc and it basically suggests you'd want to wait a couple of years. Probably an even better idea would be to wait at least until the statute of limitations runs out which would three years.

    Note too that Section 280A lets you do a little bit of personal use without screwing up the STR status. (Less than 14 days or 10 percent of actual days rented won't make much difference in many cases.)

    Finally, you want to consider Section 183 (aka the "hobby loss" rules) which is technically about activities not engaged in for profit. But in context of STRs, it means you can't do giant deductions in year 1, do some half-hearted STR deal in year 2 and then convert to a personal residence or pure personal vacation property in year 3. This doesn't work because it's obvious you were never trying to make a profit.

    P.S. There are rules for recapturing depreciation on listed personal property. That might show up with a cost segregated property that includes a backyard pool.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free