Selling to us doesn't require you to do any of this. We buy as is, and a title company handles the closing paperwork. This guide is only here if you want to understand the rules.

Why a long-held rental can bring a surprise

The building's value on your tax return has been going down for years, through depreciation, even while its market value went up. When you sell, the IRS looks at the gap between your price and that lower figure. So the tax may be larger than a simple "sold minus bought" would suggest.

The IRS rule also looks at the greater of depreciation allowed or allowable when working out one part of the gain. Unclaimed depreciation is a question for your tax professional. Bring your old returns.

The pieces, in plain words

Piece	What the source says	Ask your tax pro
Long-term gain	Held more than one year, the gain is generally long-term.	What rate applies at my income this year?
Depreciation part	The part of a long-term gain due to depreciation is taxed at a maximum 25 percent.	How much depreciation have I taken?
Investment income tax	A 3.8 percent tax can reach capital gains and rental income when income tops $250,000 joint, $200,000 single, $125,000 separate.	Does one big sale push me over?
Minnesota	Income tax starts from federal adjusted gross income, so a federally taxed gain flows through to the state return.	We didn't read the state rate table. What's the state share?
Wisconsin	30 percent of long-term gain is excluded, but not amounts treated as ordinary income from recapture.	How does it apply to my building?

Is a 1031 exchange an option?

An exchange can push the tax into the future if you buy other investment real estate. It has hard limits, so don't treat it as a plan until someone has checked yours.

It covers real property only, and property held primarily for sale doesn't qualify.
You must identify the replacement within 45 days of transferring your property.
You must receive it by the 180th day, or your return due date if that's earlier.
People usually use a qualified intermediary. Talk to one before you sign a sale, since afterward may be too late to set it up.

Those are short clocks for buying a good building. If you're trying to get out of being a landlord, an exchange into another rental may just give you a new furnace to worry about.

What about an installment sale?

If you take payments over time, the sale can be an installment sale, with at least one payment after the year of sale. It can spread out some tax, but not all of it the same way. Anything treated as depreciation recapture income is reported in the year of sale, even if no money came in that year. The depreciation part of the gain on real property has its own rule: unrecaptured section 1250 gain is reported on the installment method if that method otherwise applies, and counts before other capital gain. Which bucket your numbers fall in is a question for your tax professional, ideally before you agree to terms.

We sometimes buy on terms such as seller financing, when that fits better than cash. Your tax professional should look at how those terms would work for you. Don't sign on terms because of a tax idea you've only heard about.

Closing charges are a separate thing

Minnesota's deed tax is .0033 of the net consideration. In Wisconsin the seller pays a transfer fee of 30 cents per $100 of value. They're small next to income tax, but they're real.

What to bring to the appointment

Your original closing statement and any later improvement receipts
Your depreciation schedule, or the last few tax returns
A rough price from an offer or an agent
Any plan to buy another property, or to take payments
Whether you ever lived in it, and when

Then plug the answer into the worksheet, and you'll have a real number instead of a guess.

Sources for this page

Pages we read on 2026-11-05. Laws change, so check the current version or ask an attorney.

What tax you could owe on selling a rental