The True Cost of Selling Your Land: Federal, State, and Depreciation Taxes

The question we get most often from a landowner who’s just received an offer on their place is the same: “What’s the actual tax going to be?”

It’s almost always more than they expected.

The four taxes most landowners face

Most landowners think about “capital gains tax” as one number. It’s actually four numbers stacked on top of each other.

Federal long-term capital gains. For property held over a year, this is 15% or 20% depending on your bracket. High earners pay 20%.

Net Investment Income Tax (NIIT). An additional 3.8% surtax on investment income for households over $200K single / $250K married. Most landowner families clear this threshold the year of a big sale.

State capital gains. Varies wildly. Texas, Wyoming, Florida, Tennessee, Nevada, Washington, and a few others have no state income tax, your state hit is zero. California taxes capital gains as ordinary income at up to 13.3%. Oregon, Minnesota, Hawaii, New York, and New Jersey are also high.

Depreciation recapture. If you’ve been depreciating equipment, buildings, irrigation systems, or other improvements on your tax returns, the IRS taxes back the depreciation at up to 25% federal, plus your state’s rate.

The honest math

A Texas rancher selling for a $3M gain on land they bought decades ago, with $400K of depreciation taken over the years, is looking at roughly:

• $3M × 20% federal cap gains = $600K
• $3M × 3.8% NIIT = $114K
• $0 state (Texas has no state income tax)
• $400K × 25% depreciation recapture = $100K

Total: ~$814K, or about 27% of the gain.

Same numbers in California:

• Federal: $600K
• NIIT: $114K
• California state cap gains at 13.3% on $3M: $399K
• Depreciation recapture (federal + state): $153K

Total: ~$1.27M, or about 42% of the gain.

That’s the difference between the two coasts. Same land, same buyer, same date, different state, $450K different in taxes.

Why most landowners underestimate it

A few reasons. First, the depreciation recapture often hits people who’d forgotten they took the deductions years ago, your CPA captured it on Schedule F or Form 4562, but it never felt like a “tax break” because the savings were spread across decades.

Second, the NIIT didn’t exist before 2013, so anyone who sold land before then never paid it.

Third, state cap gains rates have crept up. California has raised its rate three times in the last decade. Oregon and New York follow.

Fourth, the timing of the gain can push you into a higher federal bracket. A retired rancher with $80K of normal annual income suddenly has a $3M gain on top, that lands them at the 20% federal cap gains rate plus the full NIIT, where if they’d planned an installment sale they might have stayed in the 15% bracket.

What a 1031 DST does to that math

A properly structured 1031 exchange into a Delaware Statutory Trust defers all four of those taxes. Federal capital gains, NIIT, state capital gains, depreciation recapture, all of it deferred for as long as you remain invested.

Held until death, the deferred tax is largely eliminated through the stepped-up basis your heirs receive. That’s not a loophole, it’s how the tax code is written.

For our Texas rancher above, that’s $814K kept invested, working, and structured for the potential of passive mailbox money for the family, not guaranteed, rather than written as a check to the IRS.

For our California rancher, it’s $1.27M.

What it doesn’t do

A DST doesn’t reduce the eventual tax bill if you take cash out instead of doing another exchange. The tax is deferred, not eliminated, until the stepped-up basis kicks in at death. If you sell the DST units in year 7 and take cash, you owe the original capital gains tax on the original land sale.

The deferral is only as good as the next plan. Which is why the conversation isn’t “should I do a DST?”, it’s “what’s the multi-decade plan for this wealth, and which tools fit each step?”

That’s the visit.