Iowa Capital Gains Tax on Real Estate

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Iowa have a capital gains tax?

Iowa capital gains tax is part of the state income tax, and for 2026 it is a flat 3.8% on all taxable income. The Iowa Department of Revenue confirmed in October 2025 that under Senate File 2442, signed in May 2024, every level of taxable individual income is taxed at 3.8% in 2026. There are no brackets, so the rate on a $50,000 gain and a $5 million gain is the same.

That is a big change from a few years ago, when Iowa had graduated rates that topped out well above 3.8%. For an apartment owner, the flat rate makes the state share of a sale easy to estimate: multiply the taxable gain by 3.8%.

Iowa income tax rate for 2026

The rate is 3.8% for every filing status. Single filers, married couples filing jointly and heads of household all pay the same percentage on Iowa taxable income, and the flat rate began with tax year 2025.

Because Iowa has no top bracket for a large gain to push you into, the timing tricks that matter in graduated-rate states matter less here. Splitting a sale across two tax years with an installment note still spreads federal tax and the 3.8% net investment income tax, but it does not lower the Iowa rate.

The Iowa capital gain deduction: who still qualifies

For most apartment owners, nobody. The Department of Revenue’s IA 100 instructions say the Iowa capital gain deduction was repealed for most transactions on or after January 1, 2023. Before then, an owner could deduct gain on real property used in a business if the property was held for 10 years and the owner materially participated for 10 years, and the material participation test that fit landlords was narrow (the instructions note that Test 4 excludes rental businesses).

Three exceptions survive. The first is real property used in a farming business, under Iowa Code section 422.7(13): you must have held the land for at least 10 years and materially participated in farming for at least 10 years, or sell it to a relative. The second and third cover cattle, horses and other breeding livestock sold by retired farmers or people with at least half their gross income from farming.

One leftover applies to non-farm property. If you sold a building on an installment note before January 1, 2023 and it qualified at the time, you can keep taking the deduction on the payments you receive now, using Form IA 100C. A new sale of an apartment building in 2026 does not qualify.

How Iowa and federal capital gains tax combine

You pay both, each on its own terms. Federally, long-term capital gain is taxed at 0%, 15% or 20%, and Revenue Procedure 2025-32 sets the 2026 start of the 20% rate at $613,700 of taxable income on a joint return and $545,500 for a single filer. Gain equal to the depreciation you took is unrecaptured Section 1250 gain, taxed at ordinary rates up to 25%.

The 3.8% net investment income tax applies once modified adjusted gross income passes $250,000 on a joint return or $200,000 for a single filer. Add Iowa’s 3.8% on top, and a high-income seller’s combined rate is about 27.6% on the capital gain portion and up to about 32.6% on the depreciation portion.

Iowa tax paid on the sale counts toward the federal state and local tax deduction only within its cap, so on a sale this size treat most of the Iowa tax as an added cost.

Do nonresidents pay Iowa tax on a property sale?

Yes. The Department of Revenue’s 2025 IA 1040 instructions tell nonresidents to include 100% of the capital gain or loss from real or tangible personal property that was located in Iowa at the time of the sale. A seller living in Nebraska, Illinois or Arizona reports the gain on Schedule IA 126 and pays Iowa tax on it.

A nonresident whose Iowa-source net income is under $1,000 does not have to file an Iowa return, but the gain on an apartment building will clear that line. We did not find a rule on the department’s pages that requires the buyer or closing agent to withhold Iowa tax from a nonresident’s sale proceeds, so plan to pay the tax yourself through estimated payments or with your return.

Selling through an LLC, partnership or S corporation

Most Iowa apartment buildings sit in an LLC taxed as a partnership. The entity files its return and passes the gain through to its members, who pay Iowa tax at 3.8% on their shares.

Out-of-state members are handled through Iowa’s composite return rules. Under Iowa Administrative Code rule 701-307.4, for tax years beginning on or after January 1, 2022, a partnership or S corporation is not required to withhold Iowa tax on a nonresident member’s share and is instead subject to the composite return requirements in chapter 405. Ask your CPA early whether the LLC will file a composite return for the sale year or whether each member will file separately.

Depreciation recapture in Iowa

Iowa has no separate recapture rate. Every dollar of gain, whether federal law calls it Section 1250 gain, Section 1245 recapture or long-term capital gain, is taxed at the same 3.8%. The split between those categories matters for your federal return, not your Iowa return.

Your Iowa gain will usually match your federal gain. Iowa adopted rolling conformity to the Internal Revenue Code for tax years beginning on or after January 1, 2020, and the department lists depreciation as a difference only for certain assets placed in service before tax year 2021. If you claimed bonus depreciation or did a cost segregation study on a building bought before 2021, your Iowa basis may differ from your federal basis, so ask whoever prepares your return to check the Iowa depreciation schedule before the year of sale.

Worked example: selling a $2M apartment building in Iowa

A married couple filing jointly sells a 24-unit building in Des Moines for $2,000,000 and pays $100,000 in selling costs. They bought it for $1,100,000 and have taken $360,000 of straight-line depreciation, so their adjusted basis is $740,000. The gain is $1,160,000: $360,000 of unrecaptured Section 1250 gain and $800,000 of long-term capital gain. Before the sale they have $250,000 of taxable income, MAGI already above $250,000 and an $850,000 loan.

Federal tax: the Section 1250 gain stacks on their $250,000 of income. The first $153,550, up to the top of the 24% bracket at $403,550, is taxed at 24%, and the other $206,450 at the 25% maximum, for $88,465. The capital gain starts at $610,000 of income, so $3,700 is taxed at 15% ($555) and $796,300 at 20% ($159,260). The 3.8% NIIT on the full gain is $44,080. Federal total: $292,360.

Iowa tax: 3.8% of $1,160,000 is $44,080, with no capital gain deduction because the building is not farm property. The combined bill is about $336,440, or 29% of the gain. After the loan payoff the couple nets $1,050,000 before tax and about $713,560 after.

How a 1031 exchange changes the Iowa tax

A 1031 exchange defers Iowa tax along with federal tax. The Department of Revenue says the Iowa Code is automatically conformed to the Internal Revenue Code, with certain exceptions, and Section 1031 is not one of them. In the example, buying a replacement worth at least $1,900,000 and reinvesting the full $1,050,000 of net cash would defer the whole $336,440.

Iowa does not track deferred gain after you exchange into another state, unlike California, Massachusetts, Montana and Oregon. Cash you keep in a partial exchange is boot, and Iowa taxes it at 3.8% in the year of sale. Our page on the 1031 exchange in Iowa covers exchange paths and a worked example, and the 1031 exchange calculator runs the federal side for your own numbers.

Ways Iowa sellers lower the tax

With a flat rate and no deduction for rental property, the Iowa share is mostly fixed once you know the gain. The work is in the federal tax and in the gain itself.

• Use a 1031 exchange to defer both federal and Iowa tax.
• Count every selling cost and capital improvement, since each dollar of basis saves 3.8% in Iowa plus federal tax.
• Use an installment sale to spread federal tax and NIIT over several years.
• If you also own farmland, check whether its sale qualifies for the farm capital gain deduction before you sell both in the same year.
• Ask your CPA to confirm your Iowa basis if the building was placed in service before 2021.

Selling an Iowa apartment building

Skyline buys apartment buildings with five or more units in Iowa, from Des Moines and Cedar Rapids to Davenport and Iowa City. We buy directly, close on your timeline, and can work inside 1031 deadlines. If you are exchanging, we can set the closing date around your replacement search and work with your intermediary.

For the tax a buyer will look at most closely, see the property tax rate in Iowa, which covers the 2026 change for apartment buildings. For tenant rules that carry over at closing, see Iowa landlord-tenant law for apartment owners.