If you own a rental property in Virginia and you’re thinking about selling, it’s important to understand how capital gains taxes will affect your profits. Rental properties follow different tax rules than primary residences, and many landlords are surprised by how these taxes are calculated.
This guide breaks down the basics in clear terms, explains what you’ll owe, and shows the strategies many Virginia landlords use to reduce or defer taxes — including selling directly to a cash buyer when repairs, vacancies, or tenants make the property difficult to manage.
What Are Capital Gains Taxes?
Capital gains taxes apply when you sell an investment for more than you paid for it.
For rental properties, this usually includes:
- The original purchase price
- Plus closing costs at the time of purchase
- Plus major capital improvements
When you sell, your profit (your “capital gain”) is taxed.
There are two types of capital gains:
- Short-term (owned less than 1 year)
- Long-term (owned more than 1 year)
Most rental properties qualify as long-term, which has a lower tax rate.
Long-Term Capital Gains Tax Rates
If you owned the property for more than one year, the IRS taxes the profit at one of the following rates:
- 0%
- 15%
- 20%
Your exact rate depends on your income bracket.
Most landlords fall into the 15% category.
Virginia also imposes state income tax, usually between 5%–5.75%, which applies to your capital gain as well.
The Tax You Can’t Ignore: Depreciation Recapture
This is the part most landlords don’t realize:
When you own a rental property, you are required to depreciate it each year for tax purposes.
Depreciation reduces your taxable income, which saves you money while you own the property.
But when you sell, the IRS takes back those benefits through something called depreciation recapture.
Depreciation recapture is taxed at:
- 25% federal rate, plus
- Virginia state income tax
So even if the property didn’t appreciate much, depreciation alone can create a tax bill.
How to Calculate Capital Gains on a Rental Property
Here is a simple example using a fictional rental in Lynchburg:
Purchase price: $150,000
Improvements: $20,000
Adjusted basis: $170,000
Depreciation over 10 years: $50,000
Adjusted basis after depreciation: $120,000
Sale price: $240,000
Selling costs: $10,000
Net sales price: $230,000
Capital Gain Calculation:
$230,000 – $120,000 = $110,000 gain
Depreciation Recapture:
$50,000 depreciated × 25% = $12,500 federal recapture tax
Plus Virginia income tax on the recaptured amount.
Remaining Gain:
$110,000 total gain – $50,000 recapture = $60,000 long-term capital gain
Long-term capital gain taxed at:
- 15% federal = $9,000
- 5.75% Virginia = $3,450
Total taxes owed on sale:
$12,500 (recapture) + $9,000 + $3,450 = $24,950
This surprises many landlords who weren’t expecting a tax bill this large.
When Capital Gains Taxes Don’t Apply
Capital gains taxes may not apply if:
- You inherited the rental property (because of a step-up in basis)
- You sell the property at a loss
- You lived in the property as your primary residence for 2 out of the last 5 years (exclusion may apply, although rental use complicates it)
Ways to Reduce or Defer Capital Gains Taxes
Landlords in Virginia commonly use the following strategies:
1. 1031 Exchange
Reinvest the profit into another investment property and fully defer capital gains taxes.
Rules are strict and time-sensitive, so planning ahead is essential.
2. Increase Your Cost Basis
Keep records of:
- Major renovations
- Improvements
- Capital expenses (not repairs)
These can reduce your taxable gain.
3. Sell During a Lower-Income Year
Your tax bracket impacts your rate.
If your income will be lower this year or next, selling strategically can reduce your tax burden.
4. Sell As-Is to Avoid More Expenses
If the home needs repairs or you’re dealing with problem tenants, it may not make sense to invest more money into the property before selling.
Selling as-is won’t reduce taxes, but it can preserve cash and make the sale easier.
When Selling As-Is for Cash Makes More Sense Than Renting Longer
Many Virginia landlords decide to sell when:
- Tenants are difficult or behind on rent
- The home needs major repairs
- Cash flow has dropped
- They want to retire or relocate
- Property management costs have increased
- They want to simplify their portfolio
Selling to a local cash buyer like Hill City Homebuyers allows you to:
- Avoid repairs
- Skip showings
- Sell with tenants in place
- Close quickly
- Pay no commissions
- Get certainty with no surprises
For tired landlords, this can be more valuable than squeezing out a few extra months of rent — especially when taxes, vacancy, and maintenance eat into profits.
Final Thoughts
Capital gains taxes are a real consideration when selling a rental property in Virginia, but they shouldn’t stop you from making the right financial decision.
Understanding how depreciation, improvements, sale price, and timing all work together will help you plan ahead and avoid surprises.
If you want to explore selling your rental property in Lynchburg, Bedford, Campbell, or anywhere in Central Virginia, Hill City Homebuyers can provide a straightforward, as-is offer and help you compare your options.