How depreciation recapture works
When you own a rental property, the IRS lets you deduct depreciation each year — a paper expense that lowers your taxable income while you hold the property. But that benefit comes due when you sell. The depreciation you claimed reduces your adjusted basis (what the IRS considers your remaining investment), which increases your taxable gain on the sale. The portion of that gain attributable to depreciation is called unrecaptured Section 1250 gain, and it is taxed at a maximum federal rate of 25% — often higher than the long-term capital gains rate that applies to the rest of your profit.
The calculation runs in three steps:
- Adjusted basis = purchase price − total depreciation claimed.
- Total gain = sale price − adjusted basis.
- Split the gain: the amount up to your total depreciation is the recapture portion (taxed at 25%); anything above that is a capital gain (taxed at 0%, 15%, or 20% depending on your income).
Worked example
Say you bought a rental for $300,000 and claimed $50,000 of depreciation over the years, then sold for $400,000. Your adjusted basis is $300,000 − $50,000 = $250,000. Your total gain is $400,000 − $250,000 = $150,000. Of that gain, the first $50,000 (matching the depreciation you took) is recaptured and taxed at 25% = $12,500. The remaining $100,000 is a long-term capital gain; at a 15% rate that's $15,000. Your total estimated tax is $27,500. Enter those same numbers above and you'll see this result.
Section 1250 vs. Section 1245
Real property (buildings) falls under Section 1250, where recapture applies only to the depreciation actually taken and is capped at the 25% rate. Personal property and certain building components (appliances, carpeting, fixtures identified in a cost segregation study) fall under Section 1245, which can be recaptured at ordinary income rates. This calculator estimates the common Section 1250 case for a rental building.
How to defer it with a 1031 exchange
If you're reinvesting the proceeds into another investment property, a 1031 like-kind exchange lets you defer both the recapture tax and the capital gains tax — potentially indefinitely, if you keep exchanging. It's a deferral, not forgiveness, but it keeps far more capital working for you. Use our 1031 exchange calculator to see how much you'd defer, and the rental depreciation calculator to see how much you're claiming each year in the first place.
Frequently asked questions
What is depreciation recapture?
It's the part of your gain on selling a rental that equals the depreciation you deducted. The IRS taxes this unrecaptured Section 1250 gain at up to 25%, separately from the capital gains rate on the rest of your profit.
How is it calculated?
Adjusted basis = purchase price − depreciation. Total gain = sale price − adjusted basis. The gain up to your total depreciation is taxed at 25%; anything above is taxed at your long-term capital gains rate.
Can I avoid it?
You can defer both recapture and capital gains tax with a 1031 exchange by rolling proceeds into another investment property within the IRS deadlines. It defers rather than eliminates the tax.
Does it apply if I sell at a loss?
No. With no gain there is no recapture. Recapture applies only to gain, and only up to the depreciation you previously claimed.
Related calculators
- 1031 Exchange Calculator — defer the tax you just estimated.
- Rental Property Depreciation Calculator — how much you deduct each year.
- Cost Segregation Calculator — accelerate depreciation up front.
- Cash-on-Cash Return Calculator — measure your annual return.
Related guides
- How to Avoid Depreciation Recapture on Rental Property — 6 legal ways to defer or reduce it.
- Unrecaptured Section 1250 Gain, Explained — why it's taxed at up to 25%.