Capital gains tax in Kentucky (2026): selling a business, real estate or farm

The half-point cut, and why it pauses at 3.5%

Kentucky has used a single rate since 2018 and has been stepping it down: 4.5% for 2023, 4% for 2024 and 2025, and 3.5% for tax years beginning on or after Jan. 1, 2026 (KRS 141.020(2)). The two examples isolate that change. The same $1.75 million business sale causes $61,250 of Kentucky tax when it closes in 2026 and $70,000 when it closed in 2025, so the later closing keeps $8,750 more in Kentucky alone.

Further cuts are not automatic. KRS 141.020(2)(g) has the state budget director test reserve and revenue conditions each September, and even when they are met the General Assembly must vote. The 2025 review fell about $7.5 million short (Louisville Public Media, Sept. 5, 2025), so the statute keeps 3.5% for 2027. A 2028 cut would need both a met test and a vote, so do not hold a closing for it.

How the full bill stacks up

At the federal level the first example owes $382,775 of income tax and $63,840 of net investment income tax, so Kentucky is a small slice of the $507,865 total. Federal long-term rates are 0%, 15% and 20%, with 20% starting above $613,700 of joint taxable income for 2026 (Rev. Proc. 2025-32); the long-term capital gains guide has the details. The bigger planning items in a Kentucky sale are usually federal: how the price is split among goodwill, real estate and equipment (purchase price allocation), whether recapture can be reduced (depreciation recapture), and timing.

Kentucky's eminent domain exclusion

One Kentucky rule has no counterpart in most states. KRS 141.010 excludes from Kentucky adjusted gross income any capital gains income attributable to property taken by eminent domain. A farm or commercial lot condemned for a highway, pipeline or utility corridor can produce a large federal gain, and Kentucky simply leaves it out. Federally the same seller can often defer the gain by reinvesting under Section 1033; Kentucky's exclusion applies whether or not you reinvest. A voluntary sale to a buyer who merely could have condemned the land is a facts question, so keep the condemnation paperwork.

Depreciation: your Kentucky gain may be smaller

For property placed in service after Sept. 10, 2001, Kentucky allows depreciation only under Section 168 as it read on Dec. 31, 2001, which means no bonus depreciation, and Section 179 expensing follows the 2003 Code without the phase-out (KRS 141.0101(16), amended 2026). Owners who took federal bonus depreciation have had higher Kentucky income in earlier years, and that leaves a higher Kentucky basis. At the sale, the Kentucky gain on that equipment or improvement is smaller than the federal gain, so have your preparer carry the separate Kentucky depreciation schedule into the year of sale.

Horses, bourbon, farms and rentals

Kentucky has no special rate for horses or distilling. Federally, horses held 24 months or more for breeding or racing can produce Section 1231 gain (IRC 1231(b)(3)), barrels of aging whiskey held for sale are inventory and produce ordinary income, and distillery or barn real estate is usually Section 1231 property. Kentucky then applies 3.5% (2026) to all of it. For land see capital gains tax on farmland; for rentals, capital gains tax on rental property.

Sellers who carry a note can spread recognition under IRC 453 because Kentucky follows federal adjusted gross income; see Section 453 installment sale. Some Kentucky cities and counties levy occupational license taxes on business net profits, so ask whether yours reaches gain on business assets.

Nonresidents, the deed tax and heirs

Nonresidents owe Kentucky tax on income from tangible property located in Kentucky and from intangibles with a Kentucky business situs (KRS 141.020(4)). Stock in a company is generally sourced to where you live, which is why some owners study moving before a sale. When real estate is conveyed, the grantor pays a transfer tax of $0.50 per $500 of value, about 0.1% (KRS 142.050).

Kentucky has no estate tax but keeps an inheritance tax that turns on the heir. Class A beneficiaries, now including siblings, nephews and nieces, are exempt; the 2026 amendment applies to deaths on or after Jan. 1, 2026. Class B heirs such as in-laws, aunts and uncles pay 4% to 16%, and Class C heirs 6% to 16% (KRS 140.070). Inherited property also gets a federal basis step-up; see step-up at death. Compare neighbors on the Tennessee, Ohio and Indiana pages.

Hans studies the tax side of Kentucky exits and lays out every path side by side. Get the Big Sale Tax Analysis.

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