Real Estate Capital Gains Taxes on Investment Properties: What You Need to Know

When you sell an investment property, you may be subject to capital gains taxes on the profit you make from the sale. Capital gains tax applies to the profit earned from the sale of a property that has appreciated in value since its purchase. However, the tax rate and specific rules depend on several factors, including the length of time you’ve owned the property, how the property is used, and your tax bracket.

This guide will help you understand how capital gains taxes apply to investment properties, as well as potential strategies to minimize your tax liability.

What Are Capital Gains Taxes?
Capital gains tax is the tax imposed on the profit made from the sale of an asset, such as real estate. In the case of investment properties, the tax applies to the difference between the property’s sale price and its original purchase price (adjusted for any improvements or deductions). If the property has increased in value, the profit is considered a capital gain.

Short-Term vs. Long-Term Capital Gains
The IRS distinguishes between short-term and long-term capital gains based on how long you’ve held the property before selling it:

Short-Term Capital Gains

If you sell the property within one year of purchase, the gain is classified as short-term. Short-term capital gains are taxed at your ordinary income tax rate, which can be as high as 37% (depending on your tax bracket).
Long-Term Capital Gains

If you hold the property for more than one year, the gain is classified as long-term. Long-term capital gains are taxed at a lower rate, ranging from 0% to 20%, depending on your income level. Additionally, the Net Investment Income Tax (NIIT) may apply, which is an additional 3.8% tax on certain investment income for higher-income individuals.
Capital Gains Tax Rates for Investment Properties
The tax rates for long-term capital gains on investment properties are structured as follows:

0%: For individuals in the lowest tax brackets (typically those with taxable income below $44,625 for single filers or $89,250 for married couples filing jointly).
15%: For individuals in the middle tax brackets (taxable income between $44,626 and $492,300 for single filers or $89,251 and $553,850 for married couples filing jointly).
20%: For individuals in the highest tax brackets (taxable income above $492,300 for single filers or $553,850 for married couples filing jointly).
For higher-income earners, the Net Investment Income Tax (NIIT) of 3.8% may also apply to the capital gains, adding an additional layer of taxation.

Factors That Affect Capital Gains Taxes on Investment Properties
Several factors can impact the amount of capital gains tax you owe when selling an investment property:

Property Sale Price and Purchase Price
The capital gain is determined by subtracting your adjusted basis (purchase price plus any capital improvements) from the sale price. If you sell at a loss or break even, there is no capital gains tax.

Depreciation Recapture
If you have claimed depreciation on your investment property during your ownership, you may be subject to depreciation recapture when you sell the property. Depreciation is a tax deduction that allows you to deduct a portion of the property’s value each year as it wears down. However, when you sell, the IRS requires you to “recapture” that depreciation and pay tax on it.

Depreciation recapture is taxed at a maximum rate of 25%.
Capital Improvements
Any capital improvements you’ve made to the property (such as adding a new roof or renovating the kitchen) can be added to your basis, reducing your taxable gain when you sell the property. Regular maintenance and repairs, however, are not considered capital improvements and cannot be added to the basis.

Exemptions and Deductions
Certain exemptions and deductions may help reduce the taxable gain. For instance, if the property was your primary residence for at least two of the last five years, you may qualify for the Section 121 Exclusion, which allows you to exclude up to $250,000 of gain ($500,000 for married couples) from the sale.

1031 Exchange
A 1031 exchange allows you to defer paying capital gains taxes if you reinvest the proceeds from the sale of one investment property into a like-kind property. This is a popular strategy for real estate investors who wish to defer taxes and continue growing their portfolio.

The new property must be similar in nature and use to the one you’re selling.
The process must be completed within strict timelines set by the IRS.
Strategies to Minimize Capital Gains Taxes on Investment Properties
Hold the Property Long-Term
One of the easiest ways to reduce your capital gains tax liability is by holding your investment property for more than one year. This qualifies you for the long-term capital gains tax rate, which is generally lower than the short-term rate.

Use a 1031 Exchange
As mentioned, a 1031 exchange can help you defer capital gains taxes by reinvesting the proceeds into another similar property. This strategy is particularly useful for investors looking to defer taxes while upgrading or diversifying their property holdings.

Offset Gains with Losses (Tax-Loss Harvesting)
If you have other investment properties or assets that have declined in value, you can sell them at a loss to offset the gains on your profitable property. This is known as tax-loss harvesting and can reduce your overall tax liability.

Invest in Opportunity Zones
Opportunity Zones are designated areas where the government provides tax incentives for investments. If you invest in property in an Opportunity Zone, you may be able to exclude or defer capital gains taxes. This option is best for long-term investors seeking tax benefits while contributing to community development.

Maximize Deductions and Write-Offs
Keep detailed records of all capital improvements and expenses related to the property. These can help lower your adjusted basis and reduce your taxable gain when you sell the property. Deductions like property management fees, repairs, insurance, and mortgage interest may all be applicable.

Conclusion
Capital gains taxes on investment properties can significantly impact your profits when you sell, but understanding the rules and using strategic tax planning can help reduce the amount you owe. Holding the property long-term, utilizing tax-deferred strategies like 1031 exchanges, and making the most of available deductions can all help you minimize capital gains tax liability.

For real estate investors, it’s essential to work with a knowledgeable tax professional or real estate advisor to ensure you’re making the most of available opportunities and reducing your tax burden when selling investment properties.

Increasing Student Success Through Instruction in Self-Determination

An enormous amount of research shows the importance of self-determination (i.e., autonomy) for students in elementary school through college for enhancing learning and improving important post-school outcomes.
Findings

Research by psychologists Richard Ryan, PhD, and Edward Deci, PhD, on Self-Determination Theory indicates that intrinsic motivation (doing something because it is inherently interesting or enjoyable), and thus higher quality learning, flourishes in contexts that satisfy human needs for competence, autonomy, and relatedness. Students experience competence when challenged and given prompt feedback. Students experience autonomy when they feel supported to explore, take initiative and develop and implement solutions for their problems. Students experience relatedness when they perceive others listening and responding to them. When these three needs are met, students are more intrinsically motivated and actively engaged in their learning.

Numerous studies have found that students who are more involved in setting educational goals are more likely to reach their goals. When students perceive that the primary focus of learning is to obtain external rewards, such as a grade on an exam, they often perform more poorly, think of themselves as less competent, and report greater anxiety than when they believe that exams are simply a way for them to monitor their own learning. Some studies have found that the use of external rewards actually decreased motivation for a task for which the student initially was motivated. In a 1999 examination of 128 studies that investigated the effects of external rewards on intrinsic motivations, Drs. Deci and Ryan, along with psychologist Richard Koestner, PhD, concluded that such rewards tend to have a substantially negative effect on intrinsic motivation by undermining people’s taking responsibility for motivating or regulating themselves.

Self-determination research has also identified flaws in high stakes, test focused school reforms, which despite good intentions, has led teachers and administrators to engage in precisely the types of interventions that result in poor quality learning. Dr. Ryan and colleagues found that high stakes tests tend to constrain teachers’ choices about curriculum coverage and curtail teachers’ ability to respond to students’ interests (Ryan & La Guardia, 1999). Also, psychologists Tim Urdan, PhD, and Scott Paris, PhD, found that such tests can decrease teacher enthusiasm for teaching, which has an adverse effect on students’ motivation (Urdan & Paris, 1994).

The processes described in self-determination theory may be particularly important for children with special educational needs. Researcher Michael Wehmeyer found that students with disabilities who are more self-determined are more likely to be employed and living independently in the community after completing high school than students who are less self-determined.

Research also shows that the educational benefits of self-determination principles don’t stop with high school graduation. Studies show how the orientation taken by college and medical school instructors (whether it is toward controlling students’ behavior or supporting the students’ autonomy) affects the students’ motivation and learning.
Significance

Self-determination theory has identified ways to better motivate students to learn at all educational levels, including those with disabilities.
Practical Application

Schools throughout the country are using self-determination instruction as a way to better motivate students and meet the growing need to teach children and youth ways to more fully accept responsibility for their lives by helping them to identify their needs and develop strategies to meet those needs.

Researchers have developed and evaluated instructional interventions and supports to encourage self-determination for all students, with many of these programs designed for use by students with disabilities. Many parents, researchers and policy makers have voiced concern about high rates of unemployment, under-employment and poverty experienced by students with disabilities after they complete their educational programs. Providing support for student self-determination in school settings is one way to enhance student learning and improve important post-school outcomes for students with disabilities. Schools have particularly emphasized the use of self-determination curricula with students with disabilities to meet federal mandates to actively involve students with disabilities in the Individualized Education Planning process.

Programs to promote self-determination help students acquire knowledge, skills and beliefs that meet their needs for competence, autonomy and relatedness (for example, see Steps to Self-determination by educational researchers Sharon Field and Alan Hoffman). Such programs also provide instruction aimed specifically at helping students play a more active role in educational planning (for example, see The Self-directed Individualized Education Plan by Jim Martin, Laura Huber Marshall, Laurie Maxson, & Patty Jerman).

Drs. Field and Hoffman developed a model designed to guide the development of self-determination instructional interventions. According to the model, instructional activities in areas such as increasing self-awareness; improving decision-making, goal-setting and goal-attainment skills; enhancing communication and relationship skills; and developing the ability to celebrate success and learn from reflecting on experiences lead to increased student self-determination. Self-determination instructional programs help students learn how to participate more actively in educational decision-making by helping them become familiar with the educational planning process, assisting them to identify information they would like to share at educational planning meetings, and supporting students to develop skills to effectively communicate their needs and wants. Examples of activities used in self-determination instructional programs include reflecting on daydreams to help students decide what is important to them; teaching students how to set goals that are important to them and then, with the support of peers, family members and teachers, taking steps to achieve those goals. Providing contextual supports and opportunities for students, such as coaching for problem-solving and offering opportunities for choice, are also critical elements that lead to meeting needs for competence, autonomy and relatedness and thus, increasing student self-determination.

How to Build a Better Educational System: Jigsaw Classrooms

The jigsaw classroom technique can transform competitive classrooms in which many students are struggling into cooperative classrooms in which once-struggling students show dramatic academic and social improvements.
Findings

In the early 1970s, in the wake of the civil rights movement, educators were faced with a social dilemma that had no obvious solution. All over the country, well-intentioned efforts to desegregate America’s public schools were leading to serious problems. Ethnic minority children, most of whom had previously attended severely under-funded schools, found themselves in classrooms composed predominantly of more privileged White children. This created a situation in which students from affluent backgrounds often shone brilliantly while students from impoverished backgrounds often struggled. Of course, this difficult situation seemed to confirm age-old stereotypes: that Blacks and Latinos are stupid or lazy and that Whites are pushy and overly competitive. The end result was strained relations between children from different ethnic groups and widening gaps in the academic achievement of Whites and minorities.

Drawing on classic psychological research on how to reduce tensions between competing groups (e.g., see Allport, 1954; Sherif, 1958; see also Pettigrew, 1998), Elliot Aronson and colleagues realized that one of the major reasons for this problem was the competitive nature of the typical classroom. In a typical classroom, students work on assignments individually, and teachers often call on students to see who can publicly demonstrate his or her knowledge. Anyone who has ever been called to the board to solve a long division problem – only to get confused about dividends and divisors – knows that public failure can be devastating. The snide remarks that children often make when their peers fail do little to remedy this situation. But what if students could be taught to work together in the classroom – as cooperating members of a cohesive team? Could a cooperative learning environment turn things around for struggling students? When this is done properly, the answer appears to be a resounding yes.

In response to real educational dilemmas, Aronson and colleagues developed and implemented the jigsaw classroom technique in Austin, Texas, in 1971. The jigsaw technique is so named because each child in a jigsaw classroom has to become an expert on a single topic that is a crucial part of a larger academic puzzle. For example, if the children in a jigsaw classroom were working on a project about World War II, a classroom of 30 children might be broken down into five diverse groups of six children each. Within each group, a different child would be given the responsibility of researching and learning about a different specific topic: Khanh might learn about Hitler’s rise to power, Tracy might learn about the U.S. entry into the war, Mauricio might learn about the development of the atomic bomb, etc. To be sure that each group member learned his or her material well, the students from different groups who had the same assignment would be instructed to compare notes and share information. Then students would be brought together in their primary groups, and each student would present his or her “piece of the puzzle” to the other group members. Of course, teachers play the important role of keeping the students involved and derailing any tensions that may emerge. For example, suppose Mauricio struggled as he tried to present his information about the atomic bomb. If Tracy were to make fun of him, the teacher would quickly remind Tracy that while it may make her feel good to make fun of her teammate, she is hurting herself and her group – because everyone will be expected to know all about the atomic bomb on the upcoming quiz.
Significance
When properly carried out, the jigsaw classroom technique can transform competitive classrooms in which many students are struggling into cooperative classrooms in which once-struggling students show dramatic academic and social improvements (and in which students who were already doing well continue to shine). Students in jigsaw classrooms also come to like each other more, as students begin to form cross-ethnic friendships and discard ethnic and cultural stereotypes. Finally, jigsaw classrooms decrease absenteeism, and they even seem to increase children’s level of empathy (i.e., children’s ability to put themselves in other people’s shoes). The jigsaw technique thus has the potential to improve education dramatically in a multi-cultural world by revolutionizing the way children learn.
Practical Application

Since its demonstration in the 1970s, the jigsaw classroom has been used in hundreds of classrooms settings across the nation, ranging from the elementary schools where it was first developed to high school and college classrooms (e.g., see Aronson, Blaney, Stephan, Rosenfield, & Sikes, 1977; Perkins & Saris, 2001; Slavin, 1980). Researchers know that the technique is effective, incidentally, because it has been carefully studied using solid research techniques. For example, in many cases, students in different classrooms who are covering the same material are randomly assigned to receive either traditional instruction (no intervention) or instruction by means of the jigsaw technique. Studies in real classrooms have consistently revealed enhanced academic performance, reductions in stereotypes and prejudice, and improved social relations.

Aronson is not the only researcher to explore the merits of cooperative learning techniques. Shortly after Aronson and colleagues began to document the power of the jigsaw classroom, Robert Slavin, Elizabeth Cohen and others began to document the power of other kinds of cooperative learning programs (see Cohen & Lotan, 1995; Slavin, 1980; Slavin, Hurley, & Chamberlain, 2003). As of this writing, some kind of systematic cooperative learning technique had been applied in about 1500 schools across the country, and the technique appears to be picking up steam. Perhaps the only big question that remains about cooperative learning techniques such as the jigsaw classroom is why these techniques have not been implemented even more broadly than they already have.