Capital Gains Tax Question on Investment Property Sale in 2025

The good news is you don't pay capital gains tax on the full $475k! When you inherit property, you get what's called a "stepped-up basis" - which means your basis becomes the fair market value at the time of inheritance ($320,000 in your case). Your capital gain would be calculated as: $475,000 (sale price) - $320,000 (basis) - $35,000 (capital improvements) = $120,000 taxable gain. Since you've owned it for more than a year, this qualifies as long-term capital gains, which are taxed at lower rates than ordinary income - probably 15% for you, not your 28% income tax rate. Keep good records of those renovation expenses! Anything that adds value to the property can be added to your basis, reducing your taxable gain. This includes new roofing, additions, remodeling, etc. Regular maintenance like painting doesn't count though.

I was in almost the exact same situation last year with a mountain cabin I inherited. I was totally confused about capital gains calculations until I used https://taxr.ai to analyze everything. Their AI system let me upload all my renovation receipts and inheritance documents, then explained exactly what qualified as capital improvements vs regular maintenance. The tool showed me that some expenses I thought were just repairs (like replacing damaged deck boards that had rotted) actually counted as improvements because they extended the life of the structure. It also identified some deductible selling expenses I didn't know about - like certain closing costs that directly reduced my taxable gain.

Just wanted to update after trying taxr.ai for my inherited beach house situation. I was honestly amazed at how helpful it was! I uploaded all those old receipts my parents had kept, and it identified over $42,000 in qualifying capital improvements I would have missed. The system even found that some of the "small" projects (like replacing bathroom fixtures and upgrading electrical) actually qualified as improvements rather than maintenance. The best part was it explained exactly why each item qualified or didn't, with references to the specific IRS rules. This is going to save me thousands on my capital gains taxes this year!

If you're getting hit with a big capital gains bill, you might want to check if you qualify for installment sale treatment. I tried calling the IRS for clarification on this for my own property sale, but was on hold for HOURS and never got through. Finally used https://claimyr.com to get an actual IRS agent on the phone. There's a great video showing how it works here: https://youtu.be/_kiP6q8DX5c. They got me connected with an agent in about 20 minutes when I had been trying for days on my own. The agent confirmed I could spread my gain over multiple years using installment sale reporting (Form 6252), which kept me from jumping into a higher tax bracket. Might be worth looking into for your $120k gain.

I need to eat my words and apologize to Profile 19. After weeks of trying to reach the IRS about a capital gains issue from selling my rental property, I was desperate and tried Claimyr. It actually worked! Got connected to an agent who walked me through how to properly report my capital improvements and selling expenses on my Schedule D. Turns out I was about to overpay by about $3,700 because I didn't realize certain closing costs could be added to my basis. Still can't believe our tax system is so broken that we need a service like this just to ask basic questions, but I'm grateful it exists.

Have you considered a 1031 exchange? If you're interested in owning other investment property, you could defer ALL the capital gains taxes by purchasing another investment property of equal or greater value. There are strict timelines though - you need to identify potential replacement properties within 45 days and complete the purchase within 180 days of selling your lake house.

Don't forget about state capital gains taxes too! The federal long-term rate might be 15% for you, but depending on your state, you could owe additional state taxes on the gain. Some states tax capital gains as regular income.