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DISCLAIMER: I am not an accountant or CPA, but here’s what I understand about rental taxation. This is NOT tax advice, and you should run anything here by a tax accountant/CPA.

There are three important property types of tax treatment out there for landlords and personal homeowners alike to know about.

Section 1231 – Business Property held for over 1 year

This includes property held for business, including rental real estate, that you’ve owned for over 1 year. Business machinery like farm equipment, expensive tools, computers, land, timber, and livestock also fall into this category. It doesn’t include product for sale like inventory, and also doesn’t include intangible assets like patents.

The key things to know are that you can depreciate it, i.e.: take a tax deduction from your business for its loss in value each year, per IRS guidelines, and that the gain when it’s sold is equal to the selling price minus the cost basis (what you paid for it, plus improvements, but not mere ‘maintenance’ costs, minus all the depreciation you’ve taken over the years.)

The amount attributed to value – (cost basis + depreciation) = capital gain, and the ‘depreciation recapture’ is taxed as ordinary income.

For example, say you bought a rental for $250 K, took depreciation of $50 K while you owned it, and added a new bathroom to it for $100 K, then sold it for $500 K. Your capital gain would be $500 K – ($250 K purchase price – $50 K depreciation (for a $200 K net basis) + $100 K improvements ) = $200 K, and then you’d also have $50 K taxed as ordinary income due to the accumulated depreciation.

Section 1245 –

Section 1250 – Buildings (i.e.: rental real estate)

For rental real estate post-1986, straight-line depreciation (vs ‘accelerated’) is the only method allowed by the IRS. For 1231 properties with only straight-line depreciation, they fall into Section 1250 for taxation, which basically means all gains are taxed as capital gains, with no ordinary income taxation on ‘depreciation recapture’ like for Section 1245 property.

https://www.investopedia.com/terms/u/unrecaptured-1250-gain.asp

Personal residence

This is the kind of property most everyone is familiar with: you buy it to live in yourself. You might rent it out later, but for now, it’s just your personal residence. This also applies to, say, vacation property that you primarily use for personal use, or vacant land that you bought just for fun and aren’t monetizing in any way. The most important things to know about your personal residence is that

1) you don’t owe anything for income taxes for the ‘imputed rent’ value it gives you,

2) you might benefit from itemizing your taxes (IF you itemize; most people don’t benefit from it and take the ‘standard deduction’ intead) and deducting the mortgage interest you pay, and

3) when you sell, you get to exclude up to $250 K if tax-filing Single ($500 K if Married Filing Jointly) of the capital gains as long as the owner lived in the home for two of the past five years.

Rental real estate taxation

https://www.fool.com/the-ascent/taxes/taxes-on-selling-a-house-what-all-homeowners-should-know/

https://www.fool.com/the-ascent/taxes/real-estate-taxes-your-complete-guide/

Good guide with sample calculations of rental profit/loss calculations here: https://thetaxbooks.com/blog/passive-vs-active-rental-income-understanding-irs-rules-and-tax-implications/

How to avoid taxes for selling: 1031 like-kind exchanges

Under certain circumstances, you can ‘exchange’ (sell one and buy another) business real estate like a rental property. This is called a 1031 or ‘like-kind’ exchange.

IRS guidance on the topic.

Source for the below: Motley fool on 1031:

“And that real estate can’t be just any old sort of real estate; it must be a “like-kind” of real estate. In short, it must have already been an investment property and must continue to be one after the exchange.

You can’t, for example, trade an apartment building for a condo that was someone’s personal home immediately before the exchange. You’d have to trade the apartment building for a condo that had been used as an investment.

[…]

It can be hard to find a like-kind property immediately available for a 1031 exchange and that the owner wants to swap for your property. Therefore, there’s such a thing as a delayed exchange. In a delayed exchange, an intermediary holds the cash after the property you wanted to exchange is sold outright and then uses it to buy another property that would otherwise qualify for a 1031 exchange.

You must choose your new property within 45 days of the sale. In fact, you can generally designate up to three properties as long as you close on at least one (in some cases, you can choose more). You also must close on the new property within 180 days of your initial sale. Since these exchanges don’t happen concurrently, they’re considered delayed.”

How to execute a 1031 exchange

Source for below: https://www.fool.com/real-estate/2022/06/15/think-real-estate-has-peaked-heres-how-to-sell-wit

“1031 exchange steps

Close on the replacement: You have 180 days from the closing of the original sale to close on a replacement property or properties. Once you close, the net purchase price and net sales price of the two transactions will be compared to ensure that the exchange was done correctly and to calculate the new cost basis of the property for taxes.

Find an intermediary: You can’t touch the money from the sale of your existing property, or it will wipe out the 1031. You need to find a trustworthy local intermediary who can work through the transaction with you.

Sell your property: You may want to hold off on actually closing a sale until you’ve at least started a few of the next steps, but selling your existing property is a key part of the transaction.

Identify replacement targets: Once you sell your existing property, you have 45 days to identify replacement investments, and you must purchase one of those targets. You can invest in multiple new properties, as long as the total purchase exceeds the net sale price of the existing property. The specific targets must be sent in writing to your intermediary by the 45-day deadline. You can identify up to three properties with an unlimited total purchase price, or an unlimited number of properties with a max purchase price of 200% of the sale price of the original property.

[…]

You could also invest in a different real estate type altogether. Here are a few of the types of investments that are allowable in a 1031 exchange:

• Multifamily: This is any property that has more than four units and is usually an apartment building or student housing.
• Commercial properties: This could be anything from a hotel to an office building to a self-storage facility. As long as the owner stays the same from property to property, (e.g., if you owned the original property through an LLC, the same LLC owns the new commercial property), there should be a wide variety of commercial options in your area.
• Farmland: This can be a great way to protect your portfolio from inflation — but you may want to hold off unless you already know a good farmer.
• Vacant land: Land banking was a popular concept 30 or so years ago. You buy raw land and hold it until you find a good investment opportunity. If you find land in a good area, it’s likely that the value will increase with inflation. Keep in mind that land banking won’t provide you with cash flow like rental properties will, but buying it could be a good way to keep some dry powder on the sidelines for a while.”

You can sell more than one property to exchange for another via 1031, but it just makes the timing that much harder, since the 45 and 180 day clocks start on the first sale.

More good examples of how the 1031 works, with actual dollars.

Personal residence exclusion and rental considerations

How rental income and expenses work

In general, you can deduct building depreciation, insurance, repairs/maintenance, property management (I assume $0 here for now?) and property taxes from rental income to get ‘Net Operating Income’. Then you also get to deduct depreciation and mortgage interest (IRS overview on this here.)

Here’s a calculator that includes tax estimates for rental income: https://www.rentwell.com/rental-property-returns-calculator

Personal residence capital gains exclusion

For the long-term capital gains exclusion, I believe so long as you meet the ‘2 years out of 5’ test you can preserve your capital gains exclusion ($250 K per person, for $500 K as a couple.) If, however, you rent for part of those 5 years, I think you don’t get the full exclusion, per this: https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/

If you plan to go OVER that amount of rental timeframe, also check with an accountant since it gets trickier to then re-establish that property as a primary residence to then get the capital gains exclusion before selling.

What if you rent before selling what was previously your personal residence?

Here’s an example of the taxation if you rent the house for more than 3 years and then try to to re-convert it into a primary residence by living there 2 years afterward before selling: https://www.merriman.com/beware-of-the-tax-cost-of-turning-your-primary-house-into-a-rental-property/

“Individuals can move back into the rental property to regain some of the exclusion.
Example 5: Tina and Troy purchased their house in June 2011 for $400,000. They turned it into a rental property in June 2015. In June 2019, they want to sell the house. Because it was a rental property for the past four years, all gains will be included in taxable income.

They decide to move back into their house in June 2019 and sell it in June 2021 for $850,000. They now qualify for the Section 121 exclusion because it was their primary house for at least two of the last five years.

When they sell their house in 2021, it had six years of qualified use as a personal residence and four years of non-qualified use as a rental property. The $450,000 of gains will be prorated between $450,000 x 60% = $270,000 that can be excluded and $450,000 x 40% = $180,000 that cannot be excluded.

Also, all depreciation that was taken during the four years as a rental property will be included in taxable income when the house is sold.

By moving back into their rental property for two years, Tina and Troy were able to exclude some, but not all, of the gains from the years they owned the property.”

Can you get clever by combining the personal residence exclusion with a 1031 rental property exchange?

Sounds like you can, per this, but CHECK WITH AN ACCOUNTANT: https://www.firstexchange.com/Convert-Primary-Residence-to-Rental-Combine-Section-121-and-1031

Disclaimer: I am not a tax preparer / CPA, and this is not tax advice. Check all of this yourself or with your accountant for your particular situation. This is only to illustrate the idea behind this method.

If you did a Roth conversion in a year in which you also ended the year with pre-tax IRA money in your own account (spouse IRAs don’t matter for this if married), you now have after-tax cost basis in your Trad IRA.

To get rid of it, you can ship the after-tax basis (convert it) to a Roth IRA and also put the pre-tax IRA amount into an employer 401k. You must do both before the end of the calendar year. Make sure to check with the employer (or self-employed) 401k first to ensure they will accept the incoming pre-tax IRA money. Then, either call your IRA provider to ask them to effect both transactions, or first convert your after-tax basis to Roth IRA, then move the remaining (pre-tax only now) Trad IRA money into the 401k afterward.

For more ways to isolate basis, read this: https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/

Method #1: Send the pre-tax money to a 401k (and the after-tax to a Roth IRA)

Let’s say you attempted a backdoor Roth IRA conversion in 2026. You put in $7,500 as a non-deductible Traditional IRA contribution, then turned around and converted the full $7,500 to Roth IRA. You neglected to realize that, at the end of 2026, you still had $22,500 in a different Traditional IRA as of 12/31/2026 (check your year end statement for the balance!)

Thus, you will have to pay taxes on the income of $7,500 * (1 – $7,500 / ($30,000)) = 7,500 * 75% = $5,625 of the conversion. The non-tax portion of the conversion was $1,875. So, your basis was the non-deductible basis portion of the conversion (the entire $7,500) minus the non-tax portion of the conversion ($1,875), which is $5,625. This becomes the new after-tax basis in your remaining $22,500 in your pre-tax IRA.

If your pre-tax IRA is now worth $25,000 in mid-year 2027, you can (1) convert the $5,625 to a Roth IRA and then (2) put the remaining $19,375 into your 401k (assuming your plan allows you to roll in outside funds. Check first before you do step (1)!)

Once you’ve done this, in 2027, you will owe no tax on the $5,625 Roth conversion, ASSUMING you end with a $0 IRA balance across all your pre-tax IRAs (including Traditional, Rollover, or SEP IRAs.)

Disclaimer: I’m not an tax professional/accountant/CPA. This is just a description of how I, as a financial advisor, understand these tax rules to work. It is not tax advice. Consult your own accountant or do your own research before acting!

Figuring out your cost basis on sold investments

Generally, cost basis is the price you paid for something. If you buy shares of Apple for $100/share and then sell them for $300/share, your cost basis is the $100/share, netting you a $200/share capital gain. If you buy gold at $3,000/troy ounce (toz) and sell it for $4,000 per toz, you have a capital gain– taxed at higher collectibles rates!– of $1,000/toz.

Since roughly 2010, brokerages have been required to track your cost basis for you electronically, making it easy for them to send you 1099-B statements listing your cost basis.

If you can identify the shares themselves by when you purchased them, you can choose to sell specific lots with specific cost bases. If you can NOT identify the shares you’re selling, the basis will be the shares you acquired first. For mutual funds, you can choose to use the average cost method instead of FIFO (first in first out.)

Always keep transaction records for the dates, prices, and any fees you’ve paid for any assets you buy!

“https://www.irs.gov/pub/irs-pdf/p551.pdf

Identifying stock or bonds sold. If you can adequately
identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of
stock or bonds. If you buy and sell securities at various
times in varying quantities and you can’t adequately identify the shares you sell, the basis of the securities you sell
is the basis of the securities you acquired first. For more
information about identifying securities you sell, see
Stocks and Bonds under Basis of Investment Property in
chapter 4 of Pub. 550.

Mutual fund shares. If you sell mutual fund shares acquired at different times and prices, you can choose to use
an average basis. For more information, see Pub. 550.

When you inherit assets

Inherited assets generally receive ‘stepped up’ cost basis at the death of the person who left you the assets. This means your own cost basis is ‘stepped up’ to the fair market value on the date that person died.

TL;DR – Inherited assets basis is usually the fair market value upon the benefactor’s death.

Ex: Your Dad purchased a house for $100,000 in 2000. He dies in January 2025, leaving the home to you. You figure the home was worth $400,000 on that date, so that’s your new cost basis. Later you sell the home for $600,000. You have a $200,000 capital gain above your cost basis.

When you are gifted assets

Cost basis for gains

When someone who is still living gifts you the assets, your basis is generally their original cost basis (+ gift taxes, if they paid any, which is rare.) Therefore, it’s important to get documentation when receiving any gifts of salable material (stocks, bonds, gold, real estate) on what the person gifting it to you originally paid for it, plus any other costs them put into it (i.e.: capitalized home improvement costs, or brokerage fees for stock purchases.)

Use FMV on the gift date when calculating losses

If you sell at a loss, the basis is the lower of the donor’s original cost or the fair market value (FMV) at the time of the gift. Ex: Your ex-girlfriend gifts you 10 shares of Fly-By-Night Enterprises valued at $0.10/share when you receive them on Valentine’s day 2026. She bought them for $0.15/share. If you go to sell them at $0.05/share later, you have a loss of 0.05/share, NOT the 0.10/share loss if you’d been able to use her basis. (If you sell at 0.12/share, I have no clue what you have: gains of 2 cents per share? No gains or losses…?)

When you don’t know your cost basis

If you don’t have the dates something was purchased, but you do have the total cost, you could figure the average cost paid per unit of the thing. I.e.: if your crazy Uncle gifts you 10 oz of gold that he paid $10,000 for– get the receipts in case the IRS comes calling!– you could use a cost basis figure of $1,000/oz that you sell in the future.

If you can figure the date(s) that something was purchased, you can often look up historical prices for the asset on those dates. If you have a date range of when it was purchased (say, a year), you might be able to average the high and low prices from that year, or the beginning and ending year prices, or be conservative (i.e.: pay more in taxes!) and take the lowest price in that year.

If you have no clue when the assets were purchased or for how much, the IRS might compel you to assume ZERO cost basis (i.e.: assume the whole thing was a taxable gain!)

The IRS generally accepts a well-documented, reasonable estimate if original records are lost. 

The below is a Google AI summary from Jan 2026 of how to make a good faith estimate of cost basis:

“Key Strategies for a Defensible Estimate:

• Utilize Historical Data: For stocks, use historical stock price databases to find the high/low or closing price on the assumed date of purchase, or calculate the average price for that year.
• Factor in Corporate Actions: Account for stock splits, mergers, and spin-offs that occurred between the purchase date and the sale date, as these alter the cost basis per share.
• Include Reinvested Dividends: If the asset was a mutual fund or stock with dividend reinvestment plans (DRIP), the original purchase price must be increased by the amount of reinvested dividends.
• “Average Cost” Method (Mutual Funds): For mutual funds, you can calculate an average cost basis by taking the total amount invested over the years and dividing it by the total shares owned.
• Reconstruct Records: Contact the broker or transfer agent to request historical records. If they cannot provide them, document your attempts to get them.
• Use Third-Party Evidence: Use bank statements, old tax returns, or correspondence with the broker to prove the cash outflow at the time of purchase.
• Inherited Assets (Step-Up Basis): For inherited assets, the cost basis is generally the Fair Market Value (FMV) on the date of the previous owner’s death. Use probate documents or estate tax records to establish this value. 

Documenting for Audit Defense
To pass IRS scrutiny, maintain a detailed file explaining how you arrived at your estimate: 

1. Written Statement: Create a document explaining that records were lost, and describe the steps taken to reconstruct them.
2. Evidence Folder: Include screenshots of historical price charts, documentation of corporate splits, and notes from phone calls with brokers.
3. Methodology Note: Note that the estimate is based on the highest-probability, lowest-gain method (e.g., assuming a higher purchase price if the date is uncertain) to show good faith in not trying to evade taxes. 

Important Considerations

• Don’t Use Zero: While a zero-basis reporting is “safe” from audit, it causes you to overpay taxes on the full sales price.
• Avoid “Convenience” Estimates: Simply guessing a number will not stand up to an audit. The estimate must be anchored in reasonable, verifiable, or logical data.
• Consider Professional Help: If the amount is large, engage a CPA or tax attorney to reconstruct the basis and provide a “reasonable cause” argument for any potential inaccuracies. 

If you cannot find any information, the IRS may require you to treat the cost basis as zero, but a documented “good-faith estimate” is always preferable. “

Click Accounts & Lists, then under ‘Your Account’, click ‘Account’.

Scroll down to ‘Manage your Data’ and hit ‘Request Data’:

Then click ‘Your Orders’:

Then check your email and click the link to get your list of orders:

For some reason, this process takes days, not seconds like it should, but eventually you’ll get your data:

And then you’ll get an email with a link to download your data: