Depreciation Recapture Tax Rate

The 25% cap

Unrecaptured Section 1250 gain is taxed at your ordinary income rate but no more than 25%. If your ordinary rate is below 25%, you pay the lower rate; if it's above, the cap protects you at 25%.

State tax stacks on top

Many states tax the gain (including the recapture portion) as regular income with no special cap. In a high-tax state, your combined rate on the recapture slice can be meaningfully above 25%.

Net investment income tax

High-income sellers may also owe the 3.8% Net Investment Income Tax on the gain. Factor it in when estimating a large sale.

A worked example: what the 25% cap actually saves you

Say you bought a rental for $400,000, allocated $320,000 to the building, and claimed $116,000 of straight-line depreciation over roughly ten years. Your adjusted basis is now $284,000. You sell for $520,000 with $30,000 of selling costs, so your amount realized is $490,000 and your total gain is $206,000.

That gain splits into two buckets. The first $116,000 — the depreciation you claimed — is unrecaptured Section 1250 gain, taxed at your ordinary rate but capped at 25%. The remaining $90,000 is ordinary long-term capital gain taxed at 0%, 15%, or 20%. If you're in the 24% ordinary bracket, the recapture slice is taxed at 24% (below the cap) for $27,840; the $90,000 of appreciation is taxed at 15% for $13,500. Federal tax on the sale is about $41,340 before any state tax or NIIT.

Notice what the cap does: without it, a seller in the 37% bracket would pay 37% on that $116,000 recapture slice. The 25% ceiling saves that high earner roughly $13,900 on this sale. A seller already below 25% gets no benefit from the cap — they simply pay their lower ordinary rate on the recapture portion.

How unrecaptured Section 1250 gain is calculated

For real property you depreciate on a straight-line basis (all residential and commercial buildings placed in service after 1986), the recapture amount equals the lesser of your total gain or the total depreciation you claimed — technically, depreciation "allowed or allowable." You cannot escape recapture by having skipped depreciation; the IRS computes it on what you could have deducted.

The IRS walks you through this on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions. The figure it produces flows to the Schedule D Tax Worksheet, where it's taxed at the special 25% maximum rate rather than the 0/15/20% long-term rate. If you sold at a loss, there is no gain and therefore no recapture — recapture only ever applies to gain, and only up to the depreciation you claimed.

Where the recapture rate sits in the stacking order

The 25% figure is a maximum, not a flat rate, because unrecaptured 1250 gain stacks on top of your ordinary income. The IRS worksheet effectively fills your ordinary brackets first, then applies your capital-gains and 25% rates to the layers above. If your ordinary taxable income is modest, part of the recapture may be taxed below 25% before the cap ever binds.

This is why a large sale in a low-income year can be materially cheaper than the same sale in a peak-earning year. Retirees, sabbatical years, or a year with business losses can all lower the effective rate on the recapture slice.

The 3.8% Net Investment Income Tax, in detail

The Net Investment Income Tax (NIIT) under IRC § 1411 adds 3.8% on the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). These thresholds are not indexed for inflation, so more sellers cross them each year.

A large gain — including both the recapture slice and the capital-gain slice — is investment income and typically pushes MAGI well past the threshold in the year of sale. In practice, that means a high-income seller's real ceiling on the recapture portion is closer to 28.8% federal (25% + 3.8%), and the appreciation slice can hit 23.8% (20% + 3.8%).

State income tax stacks on top — with no federal-style cap

Most states tax capital gains, including the recapture portion, as ordinary income with no special 25% ceiling. California, for example, taxes the entire gain at rates up to 13.3%; other high-tax states run 5%–10%+. A handful of states — Florida, Texas, Washington (on most real estate gains), Nevada, Wyoming, South Dakota, Tennessee, and Alaska — impose no personal income tax, so an in-state sale there carries no state layer.

Combine the pieces and a high-income seller in a high-tax state can face a combined rate on the recapture slice well above 25% — potentially in the high 30s or low 40s once federal 25%, the 3.8% NIIT, and state tax are added. Always model your specific state before assuming "25%" is the whole story.

How to reduce, defer, or eliminate the recapture rate

Several strategies change what you ultimately pay. A 1031 like-kind exchange defers both the capital gain and the recapture into the replacement property; done repeatedly and held until death, the deferred amounts can be wiped out by a step-up in basis under IRC § 1014. An installment sale (Form 6252) spreads the capital-gain portion over several years to keep you in lower brackets and below NIIT thresholds — but note that Section 1250 recapture is generally reported and taxed in the year of sale, even on an installment plan.

A Qualified Opportunity Fund reinvestment can defer the gain and, after a 10-year hold, eliminate tax on the fund's own appreciation. Timing the sale for a low-income year, harvesting capital losses to offset the appreciation slice, and confirming your holding period exceeds one year (so the whole gain is long-term) all help at the margins.

Common mistakes that inflate the rate

Three errors surprise sellers. First, assuming the whole gain is taxed at 15% — the depreciation slice is not, and forgetting it can understate a bill by thousands. Second, forgetting the NIIT and state tax, which together can add 8–17 percentage points. Third, believing that skipping depreciation avoids recapture — it does not, because recapture is computed on depreciation "allowed or allowable." If you never claimed depreciation you were entitled to, file Form 3115 to catch up rather than simply eating the recapture with no offsetting deductions.

Section 1245 recapture is taxed differently — and worse

The 25% cap applies only to Section 1250 real property depreciated on a straight-line basis. If a cost segregation study reclassified parts of your building into Section 1245 personal property (appliances, carpeting, specialty electrical, certain fixtures), the depreciation on those components is recaptured as ordinary income at your full marginal rate — up to 37% federal — with no 25% ceiling.

This is a deliberate tradeoff: cost segregation front-loads deductions early (a large time-value benefit), but it converts some future recapture into the higher-taxed 1245 category. For a seller in a top bracket, that slice can be taxed roughly 12 percentage points higher than ordinary 1250 recapture. The 15-year land improvements a study also creates (parking, fencing, landscaping) are technically 1250 property but, because they can be depreciated with accelerated methods, may carry some additional ordinary recapture too. Model both slices before you sell.

Filing status and timing levers that change your effective rate

Because unrecaptured 1250 gain stacks on ordinary income, when and how you sell matters. Selling in a year you have low wages — a retirement year, a sabbatical, or a year with business losses — can pull part of the recapture below the 25% cap and keep your MAGI under the NIIT thresholds ($200,000 single / $250,000 married filing jointly). Spreading a large appreciation slice over several years with an installment sale can keep you out of the 20% capital-gains bracket and below the NIIT line, though the 1250 recapture itself is still taxed in the year of sale.

Filing status matters too: married-filing-jointly thresholds for the 20% capital-gains rate and the 3.8% NIIT are roughly double the single amounts, so a joint return often keeps more of the gain in lower layers. Coordinate the sale year with your CPA rather than defaulting to whenever a buyer appears.

A quick estimation checklist before you sell

To ballpark your recapture bill: (1) pull the total depreciation claimed from your depreciation schedule or prior Schedule E filings; (2) confirm your adjusted basis (original cost + improvements − depreciation); (3) compute total gain (net sale price − adjusted basis); (4) split it — the smaller of gain or total depreciation is your unrecaptured 1250 gain taxed at up to 25%, the rest is long-term capital gain at 0/15/20%; (5) add 3.8% NIIT if your income crosses the threshold; (6) add your state's rate on the whole gain. The depreciation recapture calculator below runs these steps for you so there are no surprises at closing.

Frequently asked questions

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.

Related

• Depreciation Recapture Calculator
• Unrecaptured Section 1250 Gain, Explained