A $4 million sale is not a $4 million outcome.
Between commission, closing costs, your loan payoff, depreciation recapture, capital gains and net investment income tax, the number that reaches your account is much smaller. Below I walk the whole waterfall on one building, from the headline price down to the wire.
I am not a CPA, and nothing here is tax advice. This is general education on how the math is structured. Confirm every line with your own CPA before you act on it.
Owners find the tax bill in week three
Owners get hurt the same way every time. They run the sale decision on the gross price. $4 million sounds like $4 million.
They make the decision and sign the letter of intent. Then, somewhere around week three, their accountant explains what recapture is.
By then the options that would have helped are gone. Most meaningful tax planning has to happen before you go under contract, not after. The lesson is sequence: get the after-tax number before you make the decision.
Three tax layers stack on a sale
Layer one: depreciation recapture. Every year you owned the building, you took a depreciation deduction. That deduction lowered your taxable income each year. When you sell, all of it comes back and gets taxed at up to 25 percent.
Recapture applies even if the building barely appreciated. You could sell for close to what you paid and still owe a real number, because recapture is on the deductions you took, not on the gain.
Layer two: capital gains on the appreciation above your adjusted basis. The long-term rate is 15 or 20 percent for most owners.
Layer three: net investment income tax. Another 3.8 percent for many owners at these income levels.
Three layers, three different rates, all landing in the same tax year.
Recapture is not optional and it is not negotiable. You cannot get out of it by choosing not to claim the depreciation. The code assumes you took it whether you did or not, which is why not claiming depreciation is one of the worst decisions a building owner can make.
The waterfall: $4 million gross to net
Here is the walk on one building. Every figure is illustrative.
The building.
- Sale price: $4,000,000
- Bought years ago at $1,800,000
- Depreciation taken: about $400,000
- Adjusted basis: $1,800,000 minus $400,000 is roughly $1,400,000
Before tax.
- Commission and closing costs, call it: minus $240,000
- Loan payoff, say: minus $1,500,000
- Left before tax: $4,000,000 minus $240,000 minus $1,500,000 is $2,260,000
The gain.
- Price after costs: $4,000,000 minus $240,000 is $3,760,000
- Total gain over adjusted basis: $3,760,000 minus $1,400,000 is about $2,360,000
- Of that, $400,000 is depreciation coming back as recapture. The rest, $1,960,000, is appreciation over what you paid.
The three layers.
- Recapture: $400,000 at 25 percent is $100,000
- Capital gains: $1,960,000 at 20 percent is $392,000
- Net investment income tax: $2,360,000 at 3.8 percent is about $90,000
- Total tax: $100,000 plus $392,000 plus $90,000 is about $582,000
Net to you. $2,260,000 minus $582,000 is roughly $1.68 million on a $4 million sale.
Every lever has an early deadline
Each lever closes before the money moves.
- Entity structure. If the way you hold the building creates a problem, solve it before you are under contract.
- Purchase price allocation between real property and personal property. That gets negotiated in the agreement, not after it.
- A deferral vehicle. A 1031 exchange requires a qualified intermediary in place before closing. Not the day after. Before.
Deferral gets its own video next in this series: the 1031 exchange, the Delaware statutory trust and the 721 UPREIT, side by side.
The 45 days after you sign are covered in Apartment Building Due Diligence: The 45 Days That Decide Your Real Price. By the time you are in them, these three levers are already set.
What this does to the three-column math
In Sell, Refinance, or Hold? The 3-Column Math That Ends the Debate, I built three columns on this same $4 million building. That article put taxes at a round $400,000 placeholder. Run the three layers properly and the sell column drops.
Column one, sell. Not $4 million. After tax, about $1.68 million.
Column two, refinance. Pulls out roughly $1.2 million, with no tax at all today.
The gap closes: $4 million against $1.2 million becomes about $1.68 million against $1.2 million.
Refinancing does not win by default. Run the after-tax number before you decide, because the pre-tax comparison errs in one direction. It flatters the sale.
Your numbers will be different
Every number above is illustrative.
Your basis is different. Your entity is different. Your state is different, and a sale is taxed differently in DC, Maryland and Virginia. Some owners carry suspended passive losses that change this materially.
Build your waterfall before the letter of intent
Write down five numbers for your own building: your likely sale price, your original purchase price, the depreciation you have taken, your loan payoff, and your selling costs. Hand that page to your CPA before you sign a letter of intent and ask for the three tax layers on top.
The market and the buyers set your price. Your basis, your depreciation and your timing decide how much of it you keep.
Own a building in Washington DC, Virginia, or Maryland? State tax treatment differs across all three, and DC adds a TOPA clock to the sale timeline: Selling a DC Apartment Building
Leaning toward a sale? The Exit Navigator Scorecard puts the readiness questions on one page. Then book a free 15-minute call and we will lay out your waterfall before you go anywhere near a letter of intent. Bring your CPA if you can.
Frequently asked questions
What taxes do I pay when I sell an apartment building? Three layers stack on a sale. Depreciation recapture, taxed at up to 25 percent. Capital gains on the appreciation, at the long-term rate of 15 or 20 percent for most owners. And for many owners, net investment income tax of another 3.8 percent. All three land in the same tax year.
Do I owe depreciation recapture if my building did not go up in value? Yes. Recapture is on the deductions you took, not on the gain. You could sell for close to what you paid and still owe a real number.
Can I avoid recapture by not claiming depreciation? No. Recapture is not optional and it is not negotiable. The code assumes you took the depreciation whether you did or not, which is why not claiming it is one of the worst decisions a building owner can make.
When should I talk to my CPA about the tax on a sale? Before you sign a letter of intent. Most meaningful tax planning has to happen before you go under contract, not after. Entity structure has to be solved first, purchase price allocation is negotiated in the agreement, and a 1031 exchange needs a qualified intermediary in place before closing.