Capital Gains Taxes When Selling an Apartment Building | Chicago Multifamily Guide

Capital Gains Taxes When Selling an Apartment Building

When an owner sells a Chicago two-flat, three-flat, four-flat, or larger apartment building, taxes are often one of the most important financial considerations. Many owners focus on the sale price of the building, but the amount of taxes owed after the sale can significantly affect the final proceeds received.

Understanding how capital gains taxes work can help property owners make more informed decisions about when to sell and how to structure a transaction.

This guide explains the basic concepts involved when selling an apartment building and why taxes are often part of the conversation.

Quick Navigation

• What Are Capital Gains?
• How Capital Gains Are Calculated
• Capital Gains Tax Rates
• Depreciation and Depreciation Recapture
• Illinois State Taxes
• Planning Strategies Owners Sometimes Consider
• Related Multifamily Investment Guides

What Are Capital Gains?

Capital gains generally refer to the profit earned when a property is sold for more than the price the owner originally paid for it.

For example, if someone purchased a small apartment building for $400,000 and later sold it for $650,000, the difference between the purchase price and the sale price may be considered a capital gain.

However, the actual tax calculation is usually more complex because improvements, depreciation, and transaction costs can all affect the final numbers.

How Capital Gains Are Calculated

When determining the taxable gain from a property sale, several factors are typically considered.

The basic concept is:

Sale Price – Adjusted Basis = Capital Gain

The adjusted basis usually starts with the original purchase price of the property and then adjusts for certain items such as:

• Capital improvements made to the building
• Depreciation claimed during ownership
• Certain transaction costs related to the purchase or sale

Because these calculations can become complex, property owners often work with accountants or tax professionals when preparing for a sale.

Capital Gains Tax Rates

In the United States, capital gains taxes are generally divided into two categories: short‑term and long‑term gains.

Short‑term capital gains usually apply to properties held for one year or less and are typically taxed at ordinary income tax rates.

Long‑term capital gains usually apply when a property has been held for more than one year. These gains are often taxed at different federal rates depending on the owner's overall income level.

Because tax laws can change and individual tax situations vary, property owners should verify current rates with a qualified tax professional.

Depreciation and Depreciation Recapture

One of the most important tax concepts for rental property owners is depreciation.

Depreciation allows property owners to deduct a portion of the building’s value over time as the property ages. While depreciation can provide valuable tax benefits during ownership, it can also create additional tax considerations when the property is sold.

When a property is sold, the IRS may require some of the previously claimed depreciation to be taxed through a process called depreciation recapture.

This means that part of the gain from the sale may be taxed differently than the rest of the capital gain.

Illinois State Taxes

In addition to federal taxes, property owners in Illinois may also be subject to state income taxes on gains from the sale of real estate.

Illinois currently uses a flat income tax system, which means capital gains may be taxed as part of the owner’s state taxable income.

Owners should consider both federal and state tax obligations when estimating the total tax impact of selling a property.

Planning Strategies Owners Sometimes Consider

Because capital gains taxes can be significant, some property owners explore strategies that may help manage or defer taxes when selling real estate.

Examples sometimes discussed include:

• Timing the sale of a property based on income levels
• Reinvesting proceeds into other real estate investments
• Using tax‑deferred exchange structures in certain situations

One commonly discussed strategy is the 1031 exchange, which allows qualifying real estate investors to defer certain taxes when selling one investment property and purchasing another.
Additional guides that may be helpful when researching apartment building sales include:

• 1031 Exchange Guide for Multifamily Property
• Delaware Statutory Trust (DST) Real Estate Investments
• Chicago Multifamily Operating Expenses
• How Apartment Buildings Are Valued

Frequently Asked Questions

Do you pay capital gains when selling an apartment building?
In many situations, yes. When a property is sold for more than its adjusted basis, the difference may be taxed as a capital gain.

What is depreciation recapture?
Depreciation recapture is a tax rule that may require owners to pay tax on depreciation deductions previously taken when the property is sold.

Can real estate investors reduce capital gains taxes?
Some investors explore strategies such as timing a sale, reinvesting in other real estate, or using structures like a 1031 exchange. Tax professionals can help evaluate which strategies may apply in a specific situation.