Most people focus on price when they sell a multifamily. Fair. But the part that really blindsides owners—whether it’s a eight-unit or a small duplex —is the tax hit. And the tax impact isn’t the same for everyone.
A retired owner who bought in the early ’90s gets treated very differently from someone still running a business and carrying a mortgage. And inherited properties live in their own world entirely.
Here are three real-life scenarios, all involving the same $750k property, but three completely different tax outcomes.
1) The Long-Term Owner With No Debt (Owned 30 Years, Retired, Big Gain Coming)
This is the classic situation.
Someone bought the place in the early ’90s for peanuts in today’s money — let’s say $140k — they paid it off, kept it full, and now it’s worth $750k.
Here’s where things get sticky.
Capital gains hits hard because the IRS doesn’t care that they spent 30 years replacing boilers and mowing the lawn. They look at the difference between:
- What they paid (their basis)
- What they sell it for (minus a few adjustments)
So let’s say:
- Purchase price: $140k Tax depreciation taken over 30 years: ~ $200k (very normal)
- Adjusted basis: Basically nothing at this point
They sell for $750k. Now, they’re staring at roughly $750k of taxable gain, split between
- Depreciation recapture: taxed up to 25% on the $200k = $50k
- Long-term capital gains: typically 15% for retirees so that’s $750k sale - $200k in depreciation = $550k x 15% = about $82k
- Long-term capital gains: typically 15% for retirees so that’s $750k sale - $200k in depreciation = $550k x 15% = about $82k
- Net Investment Income Tax : 3.8% for anyone making more than $250k in investments which for this year they would. $750k sale - $200k depreciation = $550k x 3.8% = about $21k
- Total Tax Bill = $50k + $82k + $21k = $153k in taxes
This means after they sell for $750k they take home about $597k
2) The Current Owner Making $250k/yr and Still Has aMortgage (Owned 10 Years)
This one’s different.
They’re in their 40s or 50s, they own a business with a good W-2 income, and a$250k annual tax picture already before the property sells.
Let’s say:
- They bought the place in 2015 for $400k
- They’ve depreciated maybe $150k
- Their adjusted basis is around $250k ($400k-$150k)
- They sell for $750k
- They still owe $200k on the mortgage
Their gain is basically: $750k sale – $250k basis = $500k taxable gain
The difference from person 1 is they already make $250k from their business so this sale pushes them straight into the 20% capital gains bracket, plus the 3.8% Net Investment Income Tax.
- Depreciation recapture: 25% on the $150kthey wrote off. $150k × 25% = $37,500
- Long-term capital gains: $750k sale –$250k basis = $500k gain-$150k depreciation = $350k x 20% = $70k
- Net Investment Income Tax: 3.8% applies because they make $250k+. $350k × 3.8% = about $13k
- Total Tax Bill : $37.5k + $70k + $13k = about $120k in taxes
This means after they sell for $750k they take home about $630k
3) The Inherited Property (Owned 5 Years After Parents Passed)
This one’s way cleaner because they got a step-up in basis.
Let’s say:
- Their mom passed in 2020, leaving them the property which was worth $600k at that time. That becomes their newbasis.
- Now they sell for $750k.
- Their adjusted basis is around $150k ($750k-$600k)
- They’ve depreciated $40k
They sell for $750k just like the other two, but the tax bill is much more managable:
- Depreciation recapture: 25% on the $40k they wrote off = $10k
- Long-term capital gains: $150k total gain– $40k recapture = $110k x 15% (could be 20% if they’re a big earner)= about $16.5k
- Net Investment Income Tax: depends on income but assuming no other large investment sales this is likely
- Total Tax Bill: $10k + $16.5k = about $26.5k in taxes
This means after they sell for $750k they take home about$723k
CONCLUSION
The point I’m trying to make is that the tax impacts are different for everyone. The biggest advice is before you sell, talk to a tax professional to help guide you through your options. There are options to soften these tax bills – the most common one is to buy another property and do a 1031 exchange - which I have an article about here. A DST or Delaware Statutory Trust is another common one, it’s similar to a 1031 but allows someone to put their money in a passive real estate fund instead of a physical building. You could also use seller financing, you’ll still pay the capital gains taxes but spreading out their sale over a few years can lessen the blow. I have an article on that here. Strictly, the best financial advice is to have kids, then hold onto the property until you die so that they become the person in the third scenario but that requires you to manage the property in your old age, and other than cashflow, you’ll never be able to use the money from the property for yourself. Properties are risky, I personally don’t want any chance of something having the ability to wipe out my savings or cuase a massive headache when I’m 80 – but that’s just my opinion.
