Capital Gain

Sell a building for more than its adjusted basis and the difference is a capital gain. For rental property, the gain is driven mostly by NOI growth, since buyers pay a multiple of NOI through the cap rate. A property whose NOI rises is worth more at sale even if cap rates stay flat.

At a 6.5% cap rate, every $1,000 of added annual NOI is worth about $15,400 at sale. Raising the default house's NOI from $28,892 to $32,000 would lift its value from about $444,500 to about $492,300.

The taxable gain is measured from adjusted basis, not the purchase price. Past depreciation lowers the basis and raises the gain, and part of that gain is taxed as depreciation recapture. Long-term gains on property held over a year are taxed at lower federal rates than ordinary income.