What is depreciation recapture?
Depreciation recapture is a provision in the U.S. tax code that requires investors to pay tax on the depreciation deductions they previously claimed when they sell a depreciable asset at a gain. In simple terms, if you reduced your taxable income over the years by deducting depreciation, the IRS recaptures some of that tax benefit when you sell.
When you own rental real estate or business equipment, the tax code lets you deduct a portion of the asset's cost each year as depreciation. This reduces your taxable income while you own the property. But when you sell, the IRS says, "You already got a tax break for the decline in value — now you owe tax on that portion of your gain." That recaptured portion is generally taxed at a higher rate than standard long-term capital gains.
Understanding depreciation recapture before you sell is critical because many landlords and investors are blindsided by a much larger tax bill than they expected.
Section 1245 vs Section 1250
The IRS applies two different recapture rules depending on the type of asset you are selling.
**Section 1245 — Personal Property and Equipment**
Section 1245 applies to tangible personal property (machinery, equipment, vehicles) and some intangible property that has been depreciated. When you sell a Section 1245 asset at a gain, the depreciation you claimed is "recaptured" and taxed as ordinary income — at your full marginal tax rate (up to 37%). The recapture amount is the lesser of: total depreciation taken OR the total realized gain.
**Section 1250 — Real Property**
Section 1250 applies to depreciable real property, including rental buildings, commercial structures, and land improvements. Under current law, most residential rental property uses straight-line depreciation, so the "additional depreciation" recaptured under Section 1250 is often zero. However, all real property still carries an "unrecaptured Section 1250 gain" — the cumulative straight-line depreciation taken — which is taxed at a maximum federal rate of 25%, rather than your ordinary income rate.
**Key difference:** Section 1245 recapture is taxed at your ordinary rate. Section 1250 unrecaptured gain is capped at 25%.
How the calculation works
The calculator follows IRS recapture logic in five steps.
**Step 1 — Adjusted Basis** \`\`\` Adjusted Basis = Original Purchase Price − Total Depreciation Taken \`\`\`
**Step 2 — Realized Gain** \`\`\` Realized Gain = Sale Price − Adjusted Basis − Selling Costs \`\`\` Selling costs include commissions, closing costs, and other expenses of sale.
**Step 3 — Recapture Amount** \`\`\` Recapture Amount = min(Depreciation Taken, Realized Gain) \`\`\` You can only recapture up to the amount of gain. If you sell at a loss, there is no recapture.
**Step 4 — Recapture Tax** - Section 1250 (real property): recapture rate = min(your ordinary rate, 25%) - Section 1245 (personal property): recapture rate = your ordinary income rate
**Step 5 — Capital Gains Tax** \`\`\` Capital Gain = Realized Gain − Recapture Amount Capital Gains Tax = Capital Gain × Long-Term Capital Gains Rate \`\`\`
**Total Tax = Recapture Tax + Capital Gains Tax**
What is the unrecaptured Section 1250 gain?
The unrecaptured Section 1250 gain is specific to real property held long-term. It represents the total straight-line depreciation you have claimed over your ownership period, and it is taxed at a maximum federal rate of 25%.
For example: You bought a rental property for \$300,000 and took \$40,000 in depreciation over 10 years. Your adjusted basis is \$260,000. You sell for \$350,000 with \$10,000 in selling costs. Your realized gain is \$80,000. The first \$40,000 of that gain is unrecaptured Section 1250 gain (taxed at up to 25%). The remaining \$40,000 is a long-term capital gain (taxed at 0%, 15%, or 20%).
This distinction is why real estate investors in the 22% tax bracket often pay more than 15% on their real estate sale proceeds — a significant portion is taxed at 25%.
FAQs
Q: What is the depreciation recapture tax rate for rental property? A: For real property (Section 1250), unrecaptured depreciation is taxed at your ordinary income rate capped at a maximum of 25%. If your ordinary rate is 22%, your recapture rate is 22%. If your ordinary rate is 32%, your recapture rate is 25%. This is separate from the long-term capital gains rate that applies to any gain above the recapture amount.
Q: What is the difference between Section 1245 and Section 1250 recapture? A: Section 1245 applies to personal property like equipment and machinery. Recaptured depreciation is taxed at your full ordinary income rate (up to 37%). Section 1250 applies to real property like buildings. The recaptured depreciation (unrecaptured Section 1250 gain) is taxed at a maximum of 25%, which is often lower than your ordinary income rate but higher than standard capital gains rates.
Q: Do I owe depreciation recapture if I sell at a loss? A: No. Depreciation recapture only applies when you sell at a gain above your adjusted basis. If your sale price minus selling costs is less than or equal to your adjusted basis, there is no recapture.
Q: Can I avoid depreciation recapture with a 1031 exchange? A: Yes. A properly executed 1031 like-kind exchange allows you to defer both depreciation recapture and capital gains taxes by rolling the proceeds into a qualifying replacement property. The deferred taxes carry forward in the basis of the new property and become due when you eventually sell without exchanging.
Q: Does state income tax apply to depreciation recapture? A: Most states that have an income tax will also tax depreciation recapture, typically at your state ordinary income rate. This calculator covers federal tax only — add your state rate to estimate your full liability.
Q: What is the Net Investment Income Tax and does it apply? A: The NIIT is an additional 3.8% federal tax on certain investment income (including real estate gains) for taxpayers with modified adjusted gross income above \$200,000 (single) or \$250,000 (married filing jointly). This calculator does not include the NIIT — high-income sellers should factor in this additional tax.
Q: Does depreciation recapture apply to my primary residence? A: Generally not for homeowners who qualify for the Section 121 exclusion (\$250,000 or \$500,000 married). However, if you used part of your home as a rental or home office and claimed depreciation, that depreciation IS subject to recapture, even if the rest of the gain is excluded.
How to use
1. Select your asset type. Choose "Real Property" for rental buildings, structures, or land improvements (Section 1250). Choose "Personal Property / Equipment" for machinery, vehicles, or business equipment (Section 1245). 2. Enter the original purchase price you paid for the asset. 3. Enter the total accumulated depreciation you have claimed on your tax returns over the years. Check your prior tax returns or depreciation schedules for this figure. 4. Enter the sale price (the gross amount the buyer paid). 5. Enter your selling costs, including real estate commissions, closing fees, legal fees, and other expenses directly related to the sale. 6. Select your ordinary income tax rate (your federal marginal bracket). 7. Select your long-term capital gains rate (0%, 15%, or 20%, depending on your income). 8. Click "Calculate Tax" to see your adjusted basis, realized gain, recapture amount, recapture tax, capital gains tax, total tax owed, and net proceeds after tax.
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