Step 4 · The tax bill, explained before the CPA runs it
Capital Gains and Depreciation Recapture When Selling a Washington Vacation Rental
Page author
Adriano Tori
Designated Broker, Founder & CEO — RexMont Real Estate · WA Lic. #27660
Adriano leads RexMont Real Estate — the most-reviewed real estate brokerage in Seattle and the Eastside. 1,200+ closed transactions, $1B+ in production, and 1,241 five-star Google reviews.
Written and reviewed by Adriano Tori, Designated Broker, WA Lic. #27660 · last reviewed September 19, 2026 · RexMont Real Estate, 1,241 five-star Google reviews, $1B+ closed across 1,200+ transactions. Not tax, legal or lending advice.
The short answer
Gain equals the price for the real property, less selling costs, less your adjusted basis (purchase price plus capital improvements minus all depreciation taken or allowable). Depreciation on the building is taxed first at a maximum 25%; depreciation on cost-segregated personal property is recaptured as ordinary income; the remaining gain is long-term capital gain at 0%, 15% or 20%. The 3.8% net investment income tax applies above $250,000 (joint) or $200,000 (single) of income if the rental was passive.
Washington has no income tax and its capital gains excise tax exempts real estate transferred by deed. Your state cost is the real estate excise tax paid at closing.
You can defer the federal bill with a 1031 exchange, or reduce it by converting the property to your principal residence for two years before selling, with limits for the years it was a rental and for depreciation.
The tax on a short-term rental sale surprises owners in a particular way: the years in which the property produced the biggest deductions are the years that produce the biggest bill at exit. Bonus depreciation on a cost-segregation study turns a chunk of the purchase price into a first-year deduction; that same chunk comes back as ordinary income when you sell, unless you exchange. Owners who bought in 2021 or 2022, took the study, and are now selling into a market where the county has tightened permits need the number before they set a price.
This page explains the mechanics with the statute cited, so the conversation with your CPA starts at the right place and the net sheet on the cost-to-sell page reflects the real after-tax result. RexMont is not a tax adviser; the figures here are the rules as written, not advice for your return.
Step one: compute the gain
Amount realized is the contract price attributable to the real property (furnishings are a separate personal-property sale), minus selling costs: commission, excise tax, title and escrow, and other closing costs you pay. Adjusted basis is what you paid, plus capitalized improvements (a new roof, a remodel, a hot tub, a septic replacement), minus depreciation taken or allowable. "Allowable" matters: if you never depreciated a rental you were entitled to depreciate, the tax code treats the depreciation as taken anyway, so the recapture comes due even though you never got the deduction. A CPA can often fix that with an accounting-method change before the sale.
Gain is amount realized minus adjusted basis. If you held the property more than a year, it is long-term. If you used it personally as well as renting it, a portion of the gain may be allocated to personal use; the rules under §280A that governed your deductions during ownership also shape the sale.
Step two: the three tax buckets
| Bucket | What goes in it | Rate (2026) | Authority |
|---|---|---|---|
| Unrecaptured §1250 gain | Gain up to the straight-line depreciation taken on the building (27.5-year property) | Maximum 25% | 26 U.S.C. §1(h)(1)(E), (h)(6) |
| §1245 recapture | Gain up to depreciation taken on personal property and land improvements reclassified by a cost-segregation study (5-, 7-, 15-year property), including bonus depreciation | Ordinary income rates | 26 U.S.C. §1245 |
| Long-term capital gain | Everything above the depreciation | 0% up to $98,900 taxable income (joint) / $49,450 (single); 15% to $613,700 / $545,500; 20% above | Rev. Proc. 2025-32 |
| Net investment income tax | Applies to the whole gain if the rental was a passive activity and your modified AGI exceeds $250,000 (joint) or $200,000 (single) | 3.8% | 26 U.S.C. §1411 |
Brackets are for tax year 2026. A short-term rental in which you materially participated as a trade or business may be outside net investment income under §1411(c)(2); whether yours qualifies is a facts-and-circumstances question for your CPA.
Why cost segregation changes the exit math
The tax benefits page explains why owners take a cost-segregation study: it moves furniture, appliances, flooring and land improvements into short recovery periods that qualify for 100% bonus depreciation under §168(k), permanently available for property acquired after January 19, 2025. On sale, gain equal to that depreciation is recaptured under §1245 at ordinary rates, not the 25% cap that applies to building depreciation. An owner who took $150,000 of first-year bonus depreciation against a W-2 salary and sells three years later will see most of that $150,000 come back at the top marginal rate, plus the 25% recapture on the building, plus capital gain on the appreciation.
That is not an argument against the study; the deferral had value, and the depreciation offset high-bracket income in the year it was taken. It is an argument for running the exit before pricing, and for weighing the 1031 exchange, which defers all three buckets.
Converting to your primary residence: what §121 does and does not exclude
If you move into the cabin and live there as your principal residence for at least two of the five years before the sale, §121 excludes up to $250,000 of gain ($500,000 for a joint return). Two limits bite for a former rental. First, §121(d)(6) denies the exclusion for gain up to the depreciation taken after May 6, 1997; the recapture survives the conversion. Second, §121(b)(5) allocates gain to periods of "nonqualified use" after 2008, when the home was not your principal residence, and that portion is not excludable. Renting first and moving in later creates nonqualified use; moving out and renting afterward, within the five-year window, does not.
For an owner who rented a Chelan home for six years and lives in it for two before selling, roughly three-quarters of the appreciation is allocated to the rental years and stays taxable, and all the depreciation is recaptured. The conversion helps most when the rental period was short relative to the residence period, or when the appreciation is modest and the goal is to shelter the residence years.
Washington: excise tax yes, capital gains tax no
Washington's capital gains excise tax under RCW 82.87 is 7% on long-term gains above an annually indexed deduction ($278,000 for 2025), with an additional 2.9% on gains above $1,000,000 beginning tax year 2025. It does not apply to your sale: RCW 82.87.050 exempts all real estate transferred by deed, real estate contract or other recorded instrument, and depreciable property used in a business. Washington has no personal income tax.
What the state does collect is the real estate excise tax at closing: a graduated state rate of 1.10% to 3.00% plus the county's local rate, computed on the price of the real property with itemized furnishings deducted. The cost-to-sell calculator applies the right county rate and the schedule in force on your closing date; the breakpoints step up on January 1, 2027.
Timing levers a seller controls
- Tax year of closing. A late-December versus early-January closing can move the gain into a lower-income year, or split an installment sale across years.
- Installment sale. Carrying back a note spreads the capital gain across the years payments are received; recapture is generally taxed in the year of sale regardless.
- Harvesting losses elsewhere in the same year offsets the capital gain bucket, not the recapture buckets.
- Charitable strategies (a charitable remainder trust, for example) exist for very large gains and are a conversation with an estate attorney, not a listing decision.
- The 1031 exchange, which defers everything but starts a 45-day clock at closing; plan it before you list, not after you accept an offer.
Checklist
What to bring to your CPA before you list
- Closing statement from your purchase and receipts for every capitalized improvement.
- Complete depreciation schedule, including any cost-segregation study and bonus depreciation taken.
- Personal-use days by year, to confirm how the property was treated during ownership.
- Your hours log if you claimed material participation; it decides the 3.8% surtax question.
- The expected price, furnishings value and county, so the excise tax and selling costs are in the model.
- Whether a 1031 exchange or a residence conversion is on the table, so the plan is set before the 45-day clock starts.
FAQ
Questions Washington STR sellers ask first.
How is capital gains tax calculated when selling a vacation rental?
Gain is the price for the real property less selling costs, minus your adjusted basis (purchase price plus capital improvements minus depreciation taken or allowable). Building depreciation is taxed first at up to 25%, cost-segregated personal-property depreciation at ordinary rates, and the rest at long-term capital gains rates of 0%, 15% or 20%, plus the 3.8% surtax if the rental was passive and your income is above the threshold.
Does Washington State tax capital gains on real estate sales?
No. Washington's capital gains excise tax exempts real estate transferred by deed or other recorded instrument under RCW 82.87.050, and the state has no personal income tax. The state's charge on the sale is the real estate excise tax, paid by the seller at closing.
What is depreciation recapture on a rental property sale?
The portion of your gain equal to the depreciation you took (or could have taken) does not get capital gains treatment. Building depreciation is taxed at a maximum 25% as unrecaptured section 1250 gain; depreciation on personal property and land improvements from a cost-segregation study is taxed as ordinary income under section 1245. A 1031 exchange defers both.
Can I avoid capital gains by moving into my Airbnb before I sell?
Partly. Living there as your principal residence for two of the five years before sale qualifies you for the §121 exclusion of up to $250,000 ($500,000 joint), but gain allocated to the years after 2008 when it was a rental is not excludable, and depreciation taken after May 6, 1997 is always taxable. The conversion works best when the rental period was short relative to the residence period.
Does the 3.8% net investment income tax apply when I sell a short-term rental?
It applies to gain from a passive rental if your modified adjusted gross income exceeds $250,000 (joint) or $200,000 (single). A short-term rental that was a trade or business in which you materially participated may fall outside net investment income under §1411(c)(2); ask your CPA to make that determination with your hours log.
Sources we checked
- 26 U.S.C. §1(h) capital gains rates; unrecaptured §1250 gain
- IRS Rev. Proc. 2025-32 (2026 inflation adjustments)
- 26 U.S.C. §1411 net investment income tax
- 26 U.S.C. §121 exclusion of gain from principal residence
- 26 U.S.C. §168(k) bonus depreciation
- RCW 82.87 Washington capital gains tax
- WA DOR capital gains tax
- WA DOR real estate excise tax
Related on rexmont.com
Plan the exit
Selling a rental with a big depreciation history? Let us run the exit with your CPA.
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