Real Estate Tax Calc
States follow their own rules
The federal 25% cap on unrecaptured Section 1250 gain applies only at the federal level. Most states tax the same gain as ordinary income at their own rates — with no matching cap. In a high-income-tax state, the state portion alone can be a significant additional hit.
How the stack works
On a large recapture gain, you might owe up to 25% federally plus 5–13% state (depending on the state), plus potentially the 3.8% Net Investment Income Tax. The combined effective rate on the recapture slice can be meaningfully higher than 25%.
State-specific variations
A few states have no income tax (Florida, Texas, Nevada, etc.), which changes the picture. Others conform closely to federal treatment. Some states, like California, tax all gains as ordinary income without any preferential capital-gains rate, so the full recapture amount is taxed at California's top ordinary rate. Always model your specific state before projecting a sale's net proceeds.
Why the state ignores the federal 25% cap
The 25% ceiling on 'unrecaptured Section 1250 gain' is a federal rate mechanism baked into the Schedule D tax worksheet. Most states build their income tax on top of your federal adjusted gross income or federal taxable income — meaning the amount of gain generally carries over, but the federal rate structure does not. States apply their own brackets to that income. Because the great majority of states have no separate, lower rate for long-term capital gains or for Section 1250 recapture, the recapture slice simply lands in your ordinary state bracket. The federal cap protects you on your 1040; it does nothing for your state return.
The three broad categories of states
It helps to sort states into buckets. No-income-tax states — Florida, Texas, Nevada, Washington (which has a separate capital-gains excise on some gains), Wyoming, South Dakota, Alaska, Tennessee, and New Hampshire (wages untaxed) — impose no state tax on the recapture. Conforming states with a capital-gains preference tax the gain but at a somewhat lower or partially excluded rate. Full-ordinary-rate states — most notably California — tax every dollar of gain, recapture included, at the same graduated rates as wages, topping out above 13% in California. Knowing which bucket your state falls in is the first step in projecting net proceeds.
Where the property sits vs. where you live
Real estate income is generally taxed by the state where the property is located (the source state), regardless of where you live. If you own a rental in a taxing state but reside elsewhere, you typically file a nonresident return in the property's state and pay its tax on the gain and recapture. Your home state then usually gives you a credit for taxes paid to the other state to avoid double taxation — but the credit is generally limited to what your home state would have charged, so you effectively pay the higher of the two rates. Investors who move to a no-tax state before selling an out-of-state property are often surprised that the source state still taxes the sale.
State conformity to bonus depreciation matters here too
If you accelerated depreciation with cost segregation and bonus depreciation, the recapture at sale reflects all the depreciation you claimed federally. But in a state that decoupled from federal bonus depreciation, you were required to add the bonus back and depreciate on a slower state schedule — so your state depreciation total, and therefore your state basis and state recapture, can differ from the federal figures. This creates a permanent federal/state basis difference that must be reconciled at sale. The upshot: your state taxable gain is not always the same number as your federal taxable gain, and software that only tracks the federal side can get the state calculation wrong.
A worked example: federal + state + NIIT
Assume $120,000 of depreciation recapture (unrecaptured Section 1250 gain) and a high-income California resident. Federally, that slice is capped at 25%: $30,000. The 3.8% Net Investment Income Tax can apply on top for high earners: about $4,560. California taxes the same $120,000 as ordinary income; near the top bracket (around 12.3%–13.3%), that is roughly $14,760–$15,960. Add it up and the combined tax on that recapture slice approaches $49,000–$50,000 — an effective rate above 41%, far from the '25%' many owners plan around. In a no-income-tax state, the same slice costs $30,000 federal plus the possible NIIT, and no state layer at all.
Planning around the state layer
Several moves can soften the state hit. A 1031 exchange defers both the federal and the state tax — though note that some states (California's 'clawback' being the prime example) require you to keep filing and will tax the deferred gain if you eventually sell the replacement property in a cash-out sale. An installment sale spreads the gain across years, which can keep you in lower state brackets. Timing a sale for a year with lower total income helps in graduated-rate states. And for those genuinely relocating, remember the source state — not your new home state — controls the tax on property located there. Model the specific state rules before assuming any of these fully solves the problem.
How the state number is actually computed
In most states, the recapture is not a separate line item at all — it is simply part of the capital gain that flows from your federal return into your state return, where it is taxed at whatever rate the state applies to that income. A handful of states offer a partial capital-gains deduction or exclusion (for example, some allow a percentage subtraction), which can lower the effective rate on the gain including recapture. But because these preferences are the exception, the working assumption for planning should be that your state will tax the full recapture amount at your marginal state rate. Pull your state's specific treatment of long-term capital gains — that is the rate that will hit the recapture slice.
Nonresident withholding at closing
Many states require the closing agent to withhold a percentage of the sale price (or of the estimated gain) when a nonresident sells real estate located there — sometimes called FIRPTA-style state withholding. California, for instance, imposes a withholding on many sales unless an exemption applies; other states have their own versions and rates. This is not an extra tax; it is a prepayment credited against the actual liability you compute on the nonresident return, with any excess refunded. But it can tie up a meaningful chunk of your proceeds at closing, so factor it into your cash-flow planning if you are selling property in a state where you do not live.
The interplay with the federal 25% cap and NIIT
Because the three layers — federal recapture (up to 25%), the 3.8% NIIT, and state tax — stack independently, the marginal cost of the recapture slice can be surprisingly high in a top-bracket, high-tax-state scenario. Crucially, none of these layers 'credit' against the others at the federal level: you do not get to reduce your federal 25% because you also paid state tax (state income tax is only deductible as an itemized deduction, now capped). The one offset that exists is your home state's credit for tax paid to another state on the same income. When you project net proceeds, add the layers separately rather than assuming a single blended '25%' — the true combined rate on recapture in a place like California routinely exceeds 40%.
Residency planning has limits
Investors sometimes plan to establish residency in a no-income-tax state before selling to escape state tax on a large gain. This works for intangible income (like a stock sale), but real estate is different: the gain is sourced to the state where the property sits, so moving to Florida does not exempt the sale of a New York or California rental. What residency can affect is the tax on the eventual sale of a replacement property acquired through a 1031 exchange, subject to clawback rules. If minimizing state tax on a real estate sale is the goal, a 1031 exchange, installment sale, or holding until death for the step-up are generally more effective than a change of residency, which the source state can see straight through.
Bottom line for projecting a sale
Never plan a rental sale off the federal 25% figure alone. Build the projection in layers: compute the recapture and capital-gain buckets, apply the federal rates (up to 25% on unrecaptured Section 1250 gain, 0/15/20% on the remaining gain), add 3.8% NIIT if you're over the MAGI threshold, then add your state's rate on the full gain — checking for any state capital-gains preference, nonresident withholding, and bonus-depreciation basis differences. In a no-tax state your all-in rate on recapture may be ~25–29%; in a high-tax state it can push past 40%. That spread can easily be a five-figure difference on a mid-size rental, and it should inform whether you sell outright, exchange, or hold.
Frequently asked questions
Do states tax depreciation recapture?
Yes. Most states tax gains — including the recapture portion — as ordinary income at state rates, with no 25% federal cap equivalent.
What is the total recapture rate including state?
It varies, but in high-tax states you can add 5–13% state tax on top of the federal 25% (and potentially 3.8% NIIT), making the combined rate much higher.
Are there states with no recapture tax?
States with no income tax (Florida, Texas, Nevada, and others) impose no state tax on the gain, including recapture.
If I move to Florida before selling my out-of-state rental, do I avoid state tax?
Usually not. Real estate gain is taxed by the state where the property is located, so the source state can still tax the sale even after you become a Florida resident.
Does a 1031 exchange defer state tax too?
Generally yes, but watch state clawback rules. California, for example, requires ongoing filings and will tax the previously deferred California-source gain when you eventually cash out of the replacement property.
Why is my state taxable gain different from my federal gain?
Often because your state decoupled from federal bonus depreciation. Different depreciation totals produce a different state basis and a different state recapture figure than the federal calculation.
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.