Is selling a rental property a capital gain or ordinary income?
James Olson
Updated on March 08, 2026
Gains on business assets such as rental property are generally considered ordinary gains, particularly when the property was purchased to produce a rental income stream. Gains on property bought and sold primarily to profit on price appreciation are classified as capital gains.
Which capital gains are exempt from tax?
Capital Gains Exemption
| Section | Asset sold | Applicability |
|---|---|---|
| 54 | Profit on sale of property used for residence | Residential House Property |
| LTCG | ||
| One Residential House From AY 2021-22 If CG is lessthen or equal to 2 crores | ||
| Purchase – Within 1 year before or 2 years after transfer Construction – Within 3 years from transfer |
What are the exempted income under capital gains?
Capital Gains Exemption
| Section | Asset sold | Applicability |
|---|---|---|
| 54E, 54EA, 54EB, | Investment in specified securities | Long-term capital asset |
| LTCG | ||
| Specified securities – includes government securities, savings certificates, units of UTI, specified debentures, etc. | ||
| Within 6 months from the date of transfer |
How are capital gains taxed when selling a rental property?
Selling rental properties can earn investors immense profits, but may result in significant capital gains tax burdens. There are various methods of reducing capital gains tax, including tax-loss harvesting, using Section 1031 of the tax code, and converting your rental property into your primary place of residence.
How to reduce your tax exposure when selling a rental property?
What You Get: The ability to subtract those losses from the capital gains realized from the rental property sale An effective way to reduce your tax exposure when selling a rental property is to pair the gain from the sale with a loss in another area of your investments.
Do you have to pay taxes when you sell a property?
However, that income-generating machine can cost you when you sell. That’s because you will pay taxes on the capital gains (profit) when the property is sold. For 2020, the long-term capital gains tax rate is 15% if you are married filing jointly with taxable income between $78,750 and $488,850.
Is it good to sell rental property for profit?
Maintaining rental properties is a great way to earn passive income. Furthermore, many rental property owners choose to sell their properties, usually making a profit in the process. While selling a rental property can earn serious gains, sellers must understand how capital gains taxes will affect their sale.
