Depreciation Recapture: Tax Rates and How to Calculate It

Depreciation recapture is the tax owed on depreciation deductions you claimed during ownership when you sell an investment property at a gain. For real estate, that portion of the gain is classified as unrecaptured Section 1250 gain and taxed at a maximum federal rate of 25%, separately from the long-term capital gains rate that applies to the remainder of your profit.

That word “maximum” is where investors most often miscalculate. Depreciation recapture is not a flat 25% levy. It is taxed at your ordinary income tax rate, with 25% as the ceiling. If your marginal rate falls below that threshold, you pay less. Understanding how the calculation works is most consequential at two points: when estimating net proceeds from a sale, and when evaluating whether a 1031 exchange is preferable to paying the tax now.

Key Takeaways

• Depreciation recapture applies when you sell depreciable property at a gain. The portion of the gain attributable to depreciation you claimed is taxed separately from, and generally at a higher rate than, long-term capital gain.
• For real property, the recaptured amount is classified as unrecaptured Section 1250 gain, subject to a maximum federal rate of 25%. If your marginal ordinary income rate falls below that threshold, a lower rate applies to some or all of the recaptured amount.
• The amount subject to recapture is the lesser of the depreciation you claimed or your total gain. A property that sells below its original purchase price can still trigger recapture.
• Recapture is calculated on depreciation “allowed or allowable,” meaning the IRS applies it to what you were eligible to deduct, whether or not you actually claimed it.
• A properly structured 1031 exchange defers depreciation recapture along with capital gains tax. It does not eliminate either liability. Tax situations vary by individual, and you should consult a qualified tax advisor before making any decisions.

This article is intended for general informational purposes only and does not constitute individual tax, legal, or financial advice. Every investor’s tax situation is different. The tax treatment of depreciation recapture and related considerations will vary based on your specific circumstances. Consult a qualified tax advisor before making any investment or tax-related decisions.

What Is Depreciation Recapture?

Depreciation recapture is the IRS mechanism for taxing the benefit of depreciation deductions when you sell a property. Each year you own an income-producing property, you deduct a portion of its value against your taxable income — and each deduction reduces your adjusted basis. When you sell, your gain is measured against that reduced basis rather than your original purchase price, which means the deductions taken during ownership resurface as a larger taxable gain at the time of sale. You may also encounter this concept referred to as recaptured depreciation, recapture of depreciation, or the depreciation recapture tax — all terms for the same rule.

The tax code treats that resurfaced amount differently from ordinary appreciation. Consider this example: You purchased a rental property for $500,000, claimed $145,000 in depreciation, and sold for $800,000. Before accounting for selling costs, your profit has two distinct components:

• $300,000 in genuine appreciation;
• $145,000 that exists solely because your basis was written down — depreciation recapture applies to this amount.

Understanding how the tax code categorizes recaptured depreciation is essential, because this is where most explanations fall short. Real property depreciated under the Modified Accelerated Cost Recovery System (MACRS) uses a straight-line method, meaning there is generally no accelerated depreciation to recapture as ordinary income under Section 1250. Instead, the full depreciated amount is classified as unrecaptured Section 1250 gain — a distinct tax category subject to its own 25% rate ceiling.

One important distinction: Section 1245 property — which includes equipment, fixtures, and other personal property rather than the building structure itself — follows different recapture rules. Depreciation on Section 1245 property is recaptured at ordinary income rates, with no 25% ceiling, though the amount recaptured is still limited to the lesser of the depreciation claimed or the gain realized. This article focuses exclusively on real property.

How Does Depreciation Recapture Work?

Depreciation recapture follows a five-step sequence driven by  the deductions you claim during ownership.

1. You claim depreciation each year you hold the property. Residential rental property is depreciated over 27.5 years; nonresidential real property over 39 years. Both use a straight-line method with a mid-month convention that prorates the first and final years. The IRS establishes these recovery periods in Publication 946, How To Depreciate Property.
2. Each deduction reduces the property’s basis. Your property’s adjusted basis decreases by the amount you claim each year.
3. You sell at a gain. That gain is measured against your reduced basis, not the original purchase price. A long hold period therefore produces a larger taxable gain than appreciation alone would indicate.
4. The IRS separates the gain into two components. The portion attributable to depreciation is carved out first. Everything above it is treated as long-term capital gain.
5. Each component is taxed at its own rate. The depreciation portion is subject to the 25% ceiling. The remainder is taxed at the applicable long-term capital gains tax rate.

One rule catches many investors off guard: recapture applies to depreciation “allowed or allowable.” If you owned a rental for 12 years and never claimed depreciation, the IRS still calculates recapture as though you had. Forgoing the deduction does not eliminate the tax — it means you paid more income tax during ownership with no credit at sale. If you have not been claiming depreciation on a rental property, consult your tax advisor before assuming the matter resolves at closing.

What Is the Depreciation Recapture Tax Rate?

For real property, unrecaptured Section 1250 gain is taxed at a maximum federal rate of 25%, per IRS Topic No. 409.

The word “maximum” is the most commonly misread element of this rule — 25% is a ceiling, not a flat rate. Unrecaptured Section 1250 gain is taxed at ordinary income rates, with 25% capping how high those rates can reach on that portion of the gain. The gain stacks on top of your other taxable income, so your position in the rate schedule determines what you actually pay. If your marginal rate exceeds 25%, you pay the ceiling. If your marginal rate is 12% or 22%, the portion of recaptured gain that falls within those brackets is taxed at that lower rate.

Is Depreciation Recapture Always Taxed at 25%?

No. The 25% ceiling applies only when your marginal rate reaches it.

Consider two investors selling identical properties, each with $145,000 in accumulated depreciation. The first has substantial other income and a marginal rate above 25%, so the recapture is taxed at the ceiling — roughly $36,250. The second is retired with modest income and sits in a lower bracket; the same $145,000 stacks onto a smaller income base, with much of it taxed below 25%. On an identical sale, the difference in tax owed between the two can reach five figures.

For illustrative purposes only. Actual results depend on individual tax circumstances.

Is Depreciation Recapture Ordinary Income?

Not exactly. Unrecaptured Section 1250 gain is a distinct category of long-term capital gain — taxed at ordinary income rates, but subject to a 25% ceiling. It is not ordinary income, and it does not receive the standard long-term capital gains rates of 0%, 15%, or 20%. It is a separate rate group within long-term capital gain, sitting between the two.

What Else Is Taxed When You Sell?

Three additional tax layers can apply to the same sale:

• Long-term capital gains tax on any remaining gain, at 0%, 15%, or 20% depending on your total taxable income for the year.
• Net investment income tax (NIIT), an additional 3.8% on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds $200,000 for single filers or $250,000 for married filing jointly.
• State income tax, which most states assess on capital gains at ordinary income rates, with no preferential treatment.

Rates reflect the 2026 tax year; the NIIT thresholds above are set by statute and are not indexed for inflation. Confirm the figures applicable to your situation and filing year with a tax advisor.

Use the capital gains tax calculator to estimate your total tax exposure across all four components. Each layer carries a different rate, and state taxes vary significantly based on where your property is located — making the combined liability difficult to estimate without the right tools. Enter your income, filing status, and gain figures to produce a more accurate picture of what you may owe at the time of sale.

How to Calculate Depreciation Recapture

Calculating depreciation recapture follows seven steps. The arithmetic is manageable once the sequence is clear.

1. Separate land from building. Land is not depreciable. Allocate the purchase price between the two using any reasonable method — an appraisal, a contractual allocation in the purchase agreement, or the land-to-improvement ratio shown on your property tax assessment. Omitting this step overstates depreciation, and therefore overstates recapture.
2. Calculate annual depreciation. Divide the depreciable basis by 27.5 years for residential rental property or 39 years for nonresidential property. A $200,000 depreciable basis produces roughly $7,272 per year on a 27.5-year schedule, or about $5,128 per year on a 39-year schedule.
3. Total the claimed depreciation deductions. Add up all deductions taken across your holding period. Note that the mid-month convention makes the first and final years partial years.
4. Determine your adjusted basis. Start with the original purchase price, add capital improvements and acquisition costs, then subtract accumulated depreciation.
5. Calculate the total gain. Subtract the adjusted basis from the sale price, net of selling costs.
6. Split the gain. The unrecaptured Section 1250 portion equals the lesser of total depreciation claimed or total gain. Any amount above that threshold is long-term capital gain.
7. Apply the correct rate to each component.

Sales of business and investment property are reported on Form 4797, Sales of Business Property. If the property was acquired through a prior exchange, your basis is carried over from the relinquished property rather than derived from the replacement property’s purchase price — which directly affects step four above. Because so much of this calculation depends on an accurate basis figure, confirm the number with your tax advisor before using it for planning purposes.

Depreciation Recapture Example

Selling Below the Purchase Price

Step six warrants close attention, as the result often surprises investors. Consider a property purchased for $500,000 and held for 15 years, with $218,000 of accumulated depreciation and an adjusted basis of approximately $282,000. The property sells for $470,000, and after $28,000 in selling costs, the amount realized is $442,000. Although the sale price is $30,000 below the original purchase price, the gain measured against the adjusted basis is $160,000. Because accumulated depreciation exceeds that gain, the entire $160,000 is classified as unrecaptured Section 1250 gain — with no long-term capital gain component.

Selling Above the Purchase Price

A more common scenario runs in the opposite direction. A $500,000 rental property with a 20% land allocation carries a $400,000 depreciable basis, generating approximately $14,545 in annual depreciation. After 10 years, that produces roughly $145,000 of accumulated depreciation and an adjusted basis near $355,000. If the property sells for $800,000 with $48,000 in selling costs, the amount realized is $752,000 and the total gain is $397,000. Of that, $145,000 is unrecaptured Section 1250 gain and the remaining $252,000 is long-term capital gain, each taxed at its applicable rate.

For illustrative purposes only. Figures are rounded and do not reflect state tax or the net investment income tax.

Depreciation Recapture on Rental Property

Rental property is where most investors first encounter depreciation recapture. Several details apply specifically to residential rentals.

• The depreciation schedule is 27.5 years — shorter than the 39-year schedule for commercial buildings. As a result, residential rentals accumulate depreciation faster and build recapture exposure more quickly over a comparable hold period.
• Land allocation is less straightforward on a single-family rental than on a commercial property, where an appraisal typically separates it out. Most owners default to the county assessor’s land-to-improvement ratio. Document this allocation at purchase rather than attempting to reconstruct it years later under audit.
• Converted primary residences introduce additional complexity. If you lived in a home, converted it to a rental, and later sold it, any depreciation claimed during the rental period is subject to recapture. Investors who move in the opposite direction — converting an investment property into a primary residence — face a related set of rules covered in our guide to converting a 1031 exchange property to a principal residence. In that direction, recapture is rarely the largest item: under Section 121(b)(5), the share of gain allocable to years the property was held as a rental after 2008 is generally not excludable at all, no matter how long you subsequently occupy the home.
• The primary residence exclusion does not shelter recapture. This is one of the most costly misunderstandings in this area. The Section 121 exclusion can shield a significant portion of gain on a home you occupied for two of the previous five years, but it does not apply to gain attributable to depreciation claimed after May 6, 1997. An owner who rents out a former home for several years before selling may find that the exclusion covers the appreciation while the recapture remains fully taxable.

Can You Avoid Paying Depreciation Recapture?

Depreciation recapture cannot be eliminated, but it can be deferred. A 1031 exchange is the most common vehicle investors use for this purpose, though a few other approaches arise in planning conversations. Each method changes when the tax is paid, not whether it is owed. Which option applies to your situation is a question for a qualified tax advisor.

Deferring With a 1031 Exchange

A properly structured 1031 exchange defers depreciation recapture along with capital gains tax — it does not eliminate either liability.

When you exchange into like-kind replacement property rather than selling outright, the deferred gain — including the recapture component — carries forward as a reduced basis in the replacement property. Depreciation on the new property is then calculated on that carried-over basis rather than on the purchase price, producing smaller annual deductions than a fresh acquisition at the same price would generate. The liability remains attached to the investment and becomes payable when the replacement property is sold in a taxable transaction.

Two mechanics deserve attention before treating an exchange as a clean deferral.

1. Boot is taxed at the recapture rate first. If you receive cash from an exchange or reduce your debt without replacing it, that amount — known as boot — becomes taxable to the extent of the gain realized on the exchange. Recognized gain in a partial exchange is generally characterized as unrecaptured Section 1250 gain before it is characterized as capital gain. An investor who pulls $100,000 out of an exchange will likely owe tax on that amount at the recapture rate, not the lower capital gains rate. For this reason, partial exchanges are frequently more costly than investors anticipate.
2. The exchange must be structured correctly from the outset. Proceeds must flow through a qualified intermediary rather than to you directly, and both the identification and closing deadlines are strictly enforced under IRS like-kind exchange rules.

Exchanging Into a Delaware Statutory Trust

An interest in a Delaware Statutory Trust (DST) can qualify as like-kind replacement property, allowing you to defer depreciation recapture while transitioning from active ownership to a passive structure. This treatment is established under IRS Revenue Ruling 2004-86, but the ruling applies only to trusts with restricted trustee powers and a single class of beneficial interests, so not every DST will qualify. Review the DST advantages and limitations carefully before proceeding.

Holding the Property for Life

When a property is inherited, its tax basis is generally stepped up to the fair market value as of the date of the original owner’s death — a provision known as a step-up in basis. As a result, gain that accrued during the original owner’s lifetime, including the depreciation component, is generally not taxed to the heir. For investors who have exchanged repeatedly, this treatment is why estate planning and exchange planning are typically addressed together.

This is an outcome of how basis works at death, not a standalone strategy. It depends on individual circumstances and current law — both of which are subject to change — and belongs in a conversation with a qualified tax and estate advisor.

Installment Sales

Spreading proceeds across multiple years can moderate the tax owed in any single year. How recapture is treated within an installment sale depends on the type of property involved.

For real property depreciated on a straight-line basis, which covers most residential rental and commercial buildings, there is generally no ordinary recapture income to accelerate, so unrecaptured Section 1250 gain is reported as payments are received. Section 1245 property, such as equipment, is treated differently: the IRS requires that recapture income be reported in the year of sale regardless of when payment is actually received. An installment sale involving both property types can therefore produce a tax liability in year one that the payment schedule does not fund.

Depreciation Recapture and Cost Segregation

A cost segregation study accelerates depreciation by reclassifying building components into shorter recovery periods, generating larger deductions in the early years of ownership. The trade-off emerges at sale: faster depreciation reduces your basis sooner, and a lower basis means more recapture when you sell.

Components reclassified as personal property fall under Section 1245 rather than Section 1250, subjecting them to ordinary income rates with no 25% ceiling. An aggressive study can shift a meaningful portion of eventual recapture into that higher-taxed category.

This same trade-off is central to the strategy known as a lazy 1031 exchange, which applies accelerated depreciation on a new investment to offset gain from a sale rather than deferring that gain under Section 1031. Both approaches shift the timing of tax instead of eliminating it.

FAQs

What is the depreciation recapture tax rate?

For real property, unrecaptured Section 1250 gain is subject to a maximum federal rate of 25%. This 25% figure is a ceiling, not a flat rate — if your marginal ordinary income rate falls below it, you pay the lower rate on some or all of the recaptured amount. State income taxes and the 3.8% net investment income tax (NIIT) may apply in addition to the federal rate.

Is depreciation recapture taxed as ordinary income?

Not exactly. Unrecaptured Section 1250 gain is a subset of long-term capital gain taxed at a maximum federal rate of 25%, not at standard long-term capital gains rates of 0%, 15%, or 20%, and not as ordinary income. Your actual rate depends on where the gain falls within your tax brackets, up to that 25% ceiling. By contrast, Section 1245 property — such as equipment or machinery — is recaptured at ordinary income rates with no cap.

Do you owe depreciation recapture if you never claimed the depreciation?

Generally yes. The IRS calculates recapture on depreciation “allowed or allowable” — meaning it is based on what you were entitled to deduct, not what you actually deducted. If you owned a rental property and never claimed depreciation, you are still subject to recapture on the amount you could have claimed.

Do you owe depreciation recapture if you sell at a loss?

It depends on how you are measuring the loss. Recapture applies only when a sale produces a gain for tax purposes — and that gain is measured against your adjusted basis, not your original purchase price. Because depreciation reduces your adjusted basis over time, a property can sell below its original purchase price and still generate a taxable gain. However, if the sale price falls below your adjusted basis, no recapture is owed.

What happens when you sell a fully depreciated asset?

When a property is fully depreciated, it carries the largest recapture exposure since the entire depreciable basis has been written off. That said, the adjusted basis does not reach zero: land is never depreciated, so the land’s share of the original purchase price remains in basis. The gain equals the amount realized minus that remaining basis. It then splits as it would on any sale: the portion equal to depreciation claimed is unrecaptured Section 1250 gain, taxed at up to 25%, while any amount above that is taxed as long-term capital gain. The lower the adjusted basis, the greater the potential tax liability at sale.

Does a 1031 exchange eliminate depreciation recapture?

No. A 1031 exchange defers depreciation recapture, along with capital gains tax, by carrying the deferred liability into the replacement property as a reduced basis. That liability does not disappear. It becomes due when the replacement property is eventually sold in a taxable transaction.

Does the primary residence exclusion cover depreciation recapture?

No. The Section 121 exclusion can shelter gain on a home you occupied, but it does not apply to gain attributable to depreciation claimed after May 6, 1997. If a former residence was rented out prior to sale, the exclusion may apply to the appreciation — but the depreciation recapture remains taxable regardless.

Plan Your Exchange With 1031 Crowdfunding

If you are looking to defer depreciation recapture and capital gains taxes through a 1031 exchange, 1031 Crowdfunding offers the tools and expertise to help you do so.

The platform was built to give accredited investors access to a curated selection of quality replacement properties. With 70+ eligible offerings available through our online marketplace, you can review and identify replacement properties within the 45-day identification window. Because listed properties are generally already acquired, many of our clients close within 3-5 days.

Register for a free investor account to access currently available offerings. A representative will follow up to assist you in meeting your investment objectives.

This material is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Any such offer may be made only by means of the applicable Private Placement Memorandum (“PPM”) or prospectus, which contains important information regarding the investment objectives, risks, fees, expenses, and other material terms of the offering. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results, forward-looking statements and projections are not guaranteed to achieve the results described, and your actual returns may vary significantly. Investments in private placements are illiquid in nature, and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice, and you should consult with your tax advisor, as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.