Yes: both apply, but on different slices
When you sell a rental at a gain, the IRS divides that gain into two buckets. The first — equal to total depreciation you claimed — is unrecaptured Section 1250 gain, taxed at up to 25%. The second — any remaining gain above the recapture amount — is long-term capital gain, taxed at 0%, 15%, or 20%. You pay both, but never at the same rate on the same dollar. The total federal tax is the sum of both components.
A worked example
Buy at $200,000, claim $50,000 depreciation over 10 years, sell at $350,000. Adjusted basis = $200,000 - $50,000 = $150,000. Total gain = $350,000 - $150,000 = $200,000. Recapture bucket: $50,000 taxed at 25% = $12,500. Capital gain bucket: $150,000 taxed at 15% = $22,500. Federal total: $35,000, or 17.5% effective rate on the gain. Adding the 3.8% NIIT (if applicable) and state tax could bring the total effective rate to 25-30%.
What if the gain is smaller than the depreciation?
If your total gain is less than or equal to the total depreciation you claimed, the entire gain is recapture — there is no separate capital gain component. Example: sell at $220,000 (basis $150,000) with $70,000 of depreciation. Total gain = $70,000, which equals only part of depreciation. Entire gain is recaptured at up to 25%. The remaining depreciation ($0 more) does not create additional tax because there is no gain to recapture it from.
Frequently asked questions
Are capital gains and depreciation recapture the same thing?
No — they are two distinct components of the same gain taxed at different rates. Recapture covers the depreciation-equivalent portion at up to 25%; capital gains cover the rest at 0/15/20%.
Do I always pay both?
Only when total gain exceeds total depreciation claimed. If the gain is less than depreciation, everything is recapture with no separate capital gain component.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.