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.
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.
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.