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How the Gain Is Calculated
The realized gain on the sale of an Ohio rental property is calculated as: sale price minus selling costs minus adjusted basis.
Adjusted basis is the original purchase price, plus any capital improvements made during ownership (roof replacement, HVAC replacement, additions — but not routine repairs and maintenance), minus the accumulated depreciation claimed over the years of ownership. The depreciation claimed reduces the adjusted basis dollar-for-dollar, which is why properties owned for many years and fully depreciated have very low adjusted basis and produce very large realized gains.
Example: an Akron rental property purchased in 2008 for $95,000. The land portion (not depreciable) is valued at $15,000; the building portion (depreciable) is $80,000. Over 27.5 years of straight-line residential MACRS depreciation, the building portion depreciates at $2,909 per year. Through year 18 (2026), accumulated depreciation = $52,360. Capital improvements over the period: $11,000 (new roof in 2015, HVAC in 2020). Adjusted basis: $95,000 + $11,000 - $52,360 = $53,640.
If the property sells in 2026 for $165,000 with $8,000 of selling costs, the realized gain is $165,000 - $8,000 - $53,640 = $103,360.
How the Gain Is Taxed — Two Different Rates
The realized gain splits into two components, taxed at two different rates.
- Unrecaptured Section 1250 gain — the portion of the gain attributable to accumulated depreciation. In the Akron example, this is $52,360. Taxed at a maximum federal rate of 25 percent (lower if the taxpayer's marginal ordinary income tax rate is below 25 percent). The effective rate for most Ohio small landlords lands in the 22 to 25 percent range federal.
- Long-term capital gain — the portion of the gain in excess of depreciation. In the Akron example, this is $103,360 - $52,360 = $51,000. Taxed at the federal long-term capital gains rate, which is 0%, 15%, or 20% depending on taxable income, plus the 3.8% Net Investment Income Tax for higher-income filers. The effective rate for most Ohio small landlords lands in the 15 to 23.8 percent range federal.
Federal tax on the Akron example: $52,360 × 25% = $13,090 on the recapture. $51,000 × 15-23.8% = $7,650 to $12,138 on the LTCG. Total federal tax: approximately $20,740 to $25,228.
Ohio state capital gains tax: Ohio taxes capital gains as ordinary income at the state rate, which for tax year 2026 runs 2.75 to 3.5 percent for most middle-income filers, with the top bracket at 3.5 percent. For the Akron example, $103,360 × 3.5% = $3,618 Ohio state tax.
Combined federal and Ohio tax: approximately $24,358 to $28,846 — roughly 24 to 28 percent of the $103,360 realized gain.
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I inherited a house I didn't want. They were professional and easy to work with.
Strategy 1 — The 1031 Like-Kind Exchange
Under Internal Revenue Code § 1031, an Ohio landlord can defer the entire federal and Ohio tax liability by exchanging into a like-kind replacement property of equal or greater value. The mechanics are strict:
- Qualified Intermediary requirement. The sale proceeds cannot touch the landlord's bank account. They must flow through a Qualified Intermediary (QI) — a neutral third party who holds the funds between the sale of the relinquished property and the purchase of the replacement property. Ohio has multiple licensed QIs serving the market; engagement should happen before the relinquished property sale closes.
- 45-day identification window. Within 45 calendar days of the closing of the relinquished property, the landlord must identify the replacement property (or properties) in writing to the QI. The identification can be up to three properties (regardless of value) under the "3-property rule," or any number of properties whose aggregate value does not exceed 200% of the relinquished property's value under the "200% rule."
- 180-day closing window. Within 180 calendar days of the closing of the relinquished property, the landlord must close on the replacement property (or properties). The 180-day window runs concurrently with the 45-day identification window, not after it.
- Like-kind real property. Post-Tax Cuts and Jobs Act, IRC § 1031 applies only to real property held for investment or business use. A rental house can be exchanged for a rental duplex, a small commercial building, a passive Delaware Statutory Trust interest, or any other investment real estate — but not for personal-use property, REITs, or non-real-estate assets.
- Equal-or-greater value. The replacement property must be of equal or greater value than the relinquished property net of debt. Any cash or debt-relief "boot" received in the exchange is taxable up to the amount of the boot.
If properly structured, the 1031 exchange defers the entire $24,358 to $28,846 tax bill in the Akron example indefinitely. The tax basis carries forward into the replacement property. The tax becomes due only when the replacement property is eventually sold without another exchange — or is eliminated entirely if held until death and inherited with stepped-up basis under IRC § 1014.
Strategy 2 — Installment Sale Under IRC § 453
An installment sale spreads the gain — and the tax bill — across multiple tax years instead of recognizing it all in one year. The seller carries back a promissory note for part of the sale price, receives a smaller cash payment at closing, and collects principal and interest payments from the buyer over the term of the note. The gain is recognized proportionally as principal is collected.
The installment sale is the right answer when the landlord:
- Wants to spread the tax bill across multiple years to avoid pushing into higher tax brackets in any single year.
- Is willing to accept the credit risk of the buyer's payment performance — secured by a mortgage on the property.
- Has a buyer willing to accept seller financing — often a smaller cash investor or another Ohio landlord who lacks bank financing access.
The installment sale does NOT defer depreciation recapture — IRC § 453(i) requires the full depreciation recapture portion of the gain to be recognized in the year of sale, regardless of installment payment timing. Only the long-term capital gain portion is spread.
Strategy 3 — Timing and Bracket Management
The 23.8 percent federal LTCG rate applies only at higher income levels. The 15 percent rate applies to middle-income filers. The 0 percent rate applies to lower-income filers — single filers with taxable income up to approximately $48,000 in 2026, married joint filers up to approximately $96,000. For an Ohio landlord with reduced income in a particular year — retirement transition, mid-year job change, business loss — the bracket-based rate change can save thousands.
- Sell in a low-income year. A landlord retiring in 2026 with reduced wage income may have taxable income low enough to fall into the 15 percent LTCG bracket (or even the 0 percent bracket for the first portion of the gain). Selling in the retirement year produces a meaningfully lower tax bill than selling in a final-working-year.
- Time the closing across tax years. Closing on December 28 versus January 4 puts the gain in two different tax years. For a landlord with materially different income expectations across the two years, this small timing shift can produce thousands in tax savings.
- Consider Section 121 personal-residence exclusion for accidental landlords. If the landlord lived in the property as a primary residence for at least 2 of the last 5 years before sale, they may qualify for the IRC § 121 exclusion of up to $250,000 (single) or $500,000 (married joint) of capital gain. The exclusion does not eliminate depreciation recapture, but it eliminates the long-term capital gain on the personal-residence portion of ownership. This is highly valuable for accidental landlords who moved out within the past 3 years.
Real Math — Two Ohio Rental Sale Scenarios
Scenario A: Cleveland duplex, owned 2010-2026, fully depreciated. Sale price $185,000. Adjusted basis $42,000. Realized gain $143,000 (of which approximately $73,000 is unrecaptured Section 1250). Federal tax: $73,000 × 25% + $70,000 × 20% = $18,250 + $14,000 = $32,250. Plus 3.8% NIIT on portion exceeding threshold ≈ $2,000. Ohio state tax: $143,000 × 3.5% = $5,005. Total tax: approximately $39,255. After-tax proceeds on $185,000 sale: approximately $145,745.
Same property via 1031 into a $220,000 Columbus replacement single-family: zero current tax. The $32,250 federal plus $2,000 NIIT plus $5,005 Ohio state — total $39,255 — defers into the Columbus property. Cash position on the day of exchange: lower (since equity rolled into the replacement and some additional cash was contributed), but cumulative tax position deferred indefinitely.
Scenario B: Akron single-family rental, owned 1998-2026, fully depreciated, current sale price $135,000, adjusted basis $18,000. Realized gain $117,000 (of which approximately $84,000 is unrecaptured Section 1250). Tax at top rates: roughly $26,000 federal + $4,100 Ohio = $30,100. After-tax proceeds on $135,000 sale: approximately $104,900. For this landlord, an installment sale at $135,000 with $35,000 down and $100,000 carried back over 10 years at 7% spreads the LTCG portion across the decade — but the full depreciation recapture of $84,000 × 25% = $21,000 must still be recognized in the year of sale. Modest improvement vs straight cash sale, but real.
Frequently Asked Questions
1. How is depreciation recapture taxed on the sale of an Ohio rental property?
Depreciation recapture on a residential rental property under IRC § 1250 is the unrecaptured Section 1250 gain — the cumulative depreciation deductions claimed during ownership. It is taxed at a maximum federal rate of 25%. Ohio state tax adds the standard state capital gains rate (typically 3.5% for most filers).
2. What are the 1031 exchange deadlines for an Ohio rental property sale?
Under IRC § 1031, the replacement property must be identified in writing to the Qualified Intermediary within 45 days of the closing of the relinquished property, and the replacement closing must occur within 180 days of the relinquished property's closing. Both windows run concurrently from the same start date.
3. Does an installment sale defer depreciation recapture on an Ohio rental?
No. Under IRC § 453(i), the full depreciation recapture portion of the gain must be recognized in the year of sale, regardless of installment payment timing. Only the long-term capital gain portion of the gain can be spread across the installment payments. The 1031 exchange is the primary mechanism for deferring depreciation recapture.
4. Can I use the Section 121 personal-residence exclusion on a rental property in Ohio?
Yes, if you lived in the property as your primary residence for at least 2 of the 5 years preceding the sale, you can exclude up to $250,000 of capital gain ($500,000 if married filing jointly) under IRC § 121. The exclusion does not eliminate depreciation recapture — that portion of the gain must still be recognized. This is most relevant to accidental landlords who recently moved out of a former primary residence.
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What to Do Before You Sell
- Run the numbers. Use IRS Publication 544 as a primary reference. Run your specific property through a real estate tax calculation — original basis, capital improvements, accumulated depreciation, realistic sale price.
- Talk to a qualified Ohio CPA before listing or signing an offer. The $300 to $800 cost of a 90-minute planning consultation routinely saves $5,000 to $30,000 on a typical Ohio rental sale.
- If the 1031 path is on the table, engage a Qualified Intermediary before closing. The QI must be in place before the relinquished sale closes; engaging after the fact disqualifies the exchange.
- If the personal-residence exclusion under Section 121 is on the table, confirm the timeline — sale must occur within 3 years of the end of personal-residence use, with the 2-of-5-years occupancy test met.
