Does Kentucky have a capital gains tax?
Kentucky has no separate capital gains tax. A gain on an apartment building is part of Kentucky net income and taxed at the one flat rate that applies to all income. Under KRS 141.020(2)(f), that rate is 3.5% for taxable years beginning on or after January 1, 2026.
The rate dropped half a point this year. House Bill 1 (2025 Ky. Acts ch. 1) took it from 4% to 3.5%, which saves a seller $5,000 for every $1 million of gain compared with a 2025 sale. Further cuts are not automatic. KRS 141.020 sets an annual review against revenue triggers, but the Department of Revenue can’t lower the rate until the General Assembly acts, so plan on 3.5% for a 2027 sale unless the law changes. Revenue fell just short of the trigger for a 2027 cut, and the 2026 session did not cut the rate anyway, according to news reports in September 2026.
Kentucky income tax rates by year
The rate that applies depends on the tax year the sale closes in, not when you signed the contract. A December closing is taxed at that year’s rate, so a sale that slips from late 2025 into early 2026 saved the seller half a point.
- Short-term and long-term gains are taxed alike in Kentucky. The one-year holding period matters only federally.
- Depreciation recapture is taxed at the same 3.5% as the rest of the gain.
- An installment sale reports gain as payments arrive, so each year’s share is taxed at the rate for that year. With the rate fixed at 3.5% unless lawmakers act, the Kentucky saving from spreading the gain is small; the federal bracket effect is usually the bigger reason to use one.
| Tax year | Kentucky rate | Tax on a $1,000,000 gain |
|---|---|---|
| 2025 | 4.0% | $40,000 |
| 2026 | 3.5% | $35,000 |
| 2027 and later | 3.5% unless the General Assembly cuts it | $35,000 |
How Kentucky and federal capital gains tax stack
Kentucky starts from federal income, so a gain shows up on both returns and the taxes add together. The federal share is much larger.
Federal long-term gain is taxed at 0%, 15% or 20%. IRS Revenue Procedure 2025-32 sets the 2026 start of the 20% rate at $545,500 of taxable income for a single filer and $613,700 for a joint return. The part of the gain equal to depreciation taken is unrecaptured Section 1250 gain, taxed federally at up to 25%. The 3.8% net investment income tax applies to the smaller of net investment income or the amount modified adjusted gross income exceeds $200,000 for a single filer or $250,000 jointly.
Kentucky does not split the gain into those pieces. It taxes the whole Kentucky gain at 3.5%, so in the example below the Kentucky tax comes to about 14% of the federal bill.
Depreciation recapture and Kentucky’s depreciation rules
Kentucky taxes recaptured depreciation at 3.5%, but the depreciation it allows can differ from what you took federally. KRS 141.0101 ties Kentucky depreciation to Section 168 of the Internal Revenue Code as it stood on December 31, 2001, for property placed in service after September 10, 2001. Federal bonus depreciation came later, so Kentucky does not allow it.
Section 179 expensing is frozen too. Kentucky uses the federal Section 179 rules in effect on December 31, 2001 for property placed in service before 2020, and the rules in effect on December 31, 2003 for property placed in service on or after January 1, 2020.
The result for a seller is two depreciation schedules. If you used a cost segregation study and bonus depreciation, your Kentucky basis is higher than your federal basis, and your Kentucky gain at sale can be lower than your federal gain. Give your preparer the Kentucky depreciation history so the Kentucky return uses the right basis.
For tax years beginning in 2026, KRS 141.010 now references the Internal Revenue Code as in effect on December 31, 2025, after an update by 2026 Ky. Acts ch. 161, effective July 15, 2026. The depreciation freeze in KRS 141.0101 still overrides that general update.
Selling Kentucky property as a nonresident or through an LLC
Nonresidents owe Kentucky tax on a Kentucky building. KRS 141.020(4) taxes a nonresident on income from business done in Kentucky and from tangible property located in Kentucky, which takes in the gain on a Louisville or Lexington apartment building. An Indiana or Ohio owner who sells one files a Kentucky nonresident return for the year of the sale.
We found no Kentucky rule requiring a title company to withhold income tax from an individual seller at closing. Pass-through entities are a different matter. KRS 141.206(4) requires a partnership, LLC or S corporation to withhold Kentucky tax on each nonresident individual owner’s share of income, distributed or not, at the maximum KRS 141.020 rate, which is 3.5% for 2026. The entity can skip withholding for an owner who filed and paid Kentucky tax for the prior year, if it shows the Department of Revenue that the owner did.
Worked example: selling a $2M apartment building in Kentucky
A single owner in Louisville sells a 28-unit building for $2,000,000 and pays $100,000 in selling costs, so the amount realized is $1,900,000. She paid $1,200,000 and has taken $330,000 of straight-line depreciation, so her adjusted basis is $870,000 and her gain is $1,030,000: $330,000 of unrecaptured Section 1250 gain and $700,000 of long-term capital gain. She has $220,000 of other taxable income and an $800,000 mortgage.
Federal tax: the Section 1250 gain is figured at the 25% maximum, $82,500. Her other income plus the Section 1250 gain is $550,000, already above the $545,500 line, so all $700,000 of capital gain is taxed at 20%, or $140,000. Her modified adjusted gross income is $1,250,000, so the 3.8% tax applies to the full $1,030,000 of investment income, or $39,140. Federal total: $261,640.
Kentucky tax: 3.5% of $1,030,000 is $36,050. Combined tax is $297,690, about 28.9% of the gain. After paying off the loan she nets $1,100,000 before tax and about $802,310 after. Had she closed in 2025 at the 4% rate, the Kentucky tax would have been $41,200.
| Item | Amount |
|---|---|
| Sale price | $2,000,000 |
| Selling costs | $100,000 |
| Adjusted basis | $870,000 |
| Total gain | $1,030,000 |
| Federal Section 1250 tax (25%) | $82,500 |
| Federal capital gains tax (20%) | $140,000 |
| Net investment income tax (3.8%) | $39,140 |
| Kentucky income tax (3.5%) | $36,050 |
| Total tax | $297,690 |
How a 1031 exchange changes the Kentucky tax
A valid 1031 exchange defers the Kentucky tax along with the federal tax, because deferred gain never enters federal or Kentucky income. In the example, buying a replacement worth at least $1,900,000 and reinvesting all $1,100,000 of net proceeds would defer the whole $297,690.
Kentucky has no clawback. Four states, California, Massachusetts, Montana and Oregon, keep tracking deferred gain after an owner exchanges out, but Kentucky does not, so a Lexington seller who buys in Knoxville or Indianapolis files nothing extra with Kentucky in later years. Boot, whether cash kept or debt not replaced, is taxed at 3.5% in the year of sale. Our page on the 1031 exchange in Kentucky covers the state side in more detail.
Kentucky compared with neighboring states
Kentucky’s 3.5% rate sits in the middle of its neighbors. The table shows the 2026 state rate that applies to a real estate gain in Kentucky and six of the seven states around it, from each state’s revenue department or statute.
The building’s location decides which state taxes the gain, and the seller’s home state may tax it as well. A Tennessee resident who owns an apartment building in Bowling Green owes Kentucky 3.5% on the gain even though Tennessee has no income tax, and an Ohio resident who sells in Covington owes Kentucky as a nonresident. Missouri now lets individuals subtract all income reported as a federal capital gain under House Bill 594 of 2025, but that helps only with Missouri property or Missouri residents, not with a Kentucky building.
Indiana’s state rate is lower than Kentucky’s, but Indiana residents also pay county income tax of 0.5% to 3% on the same gain, so an Indianapolis seller pays more in state and county income tax than a Louisville seller pays in Kentucky state tax, before any Kentucky local occupational license tax.
| State | 2026 state rate on a real estate gain |
|---|---|
| Tennessee | No personal income tax |
| Missouri | 0% on income reported as a federal capital gain |
| Ohio | 2.75% above $26,050, or 3% on business income after a $250,000 deduction |
| Indiana | 2.95%, plus county tax of 0.5% to 3% for residents |
| Kentucky | 3.5% |
| Illinois | 4.95% |
| Virginia | Up to 5.75% |
Other costs of selling in Kentucky
Kentucky charges a real estate transfer tax when the deed is recorded. Under KRS 142.050 it is 50 cents for each $500 of value, which works out to $1 per $1,000, and it is imposed on the grantor, the seller. On a $2,000,000 sale that is $2,000. The statute’s exemptions do not include like-kind exchanges, so expect to pay it on an exchange sale too.
Because the income tax rate is low and flat, Kentucky sellers have fewer state-specific planning moves than sellers in high-tax states. An installment sale can spread the gain and keep more of it out of the top federal bracket, and holding the building until death gives heirs a stepped-up basis. Local occupational license taxes in Kentucky cities and counties were not reviewed for this page, so ask your CPA whether one applies to your sale.
Selling a Kentucky apartment building
Skyline buys apartment buildings with five or more units in Kentucky, including Louisville, Lexington, Northern Kentucky and Bowling Green. We buy directly, close on your timeline, and can work inside 1031 deadlines. If you plan an exchange, we can set a closing date that gives you time to line up a replacement and we work with your intermediary on the assignment.
For the yearly tax a buyer will model, see our page on the property tax rate in Kentucky, and for the tenant rules that come with the building, Kentucky landlord-tenant law for apartment owners.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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