Unrecaptured Section 1250 gain is the part of your profit on selling depreciated real property that equals the depreciation you deducted over the years. Because those deductions lowered your ordinary income while you held the property, Congress reclaims part of that benefit at sale by taxing this slice of gain at a higher maximum rate — 25% — instead of the standard long-term capital gains rate of 0%, 15%, or 20%.
Why it exists
Depreciation is a paper deduction: it reduces your taxable rental income each year even though you spent nothing that year. When you sell, those deductions have reduced your adjusted basis, which increases your taxable gain. The unrecaptured Section 1250 rules say the portion of that gain attributable to depreciation shouldn't get the lowest capital gains rate — so it's capped at 25%. It's a compromise: not as harsh as ordinary income rates, but higher than a normal long-term capital gain.
Section 1250 vs. Section 1245
The distinction trips up many investors:
- Section 1250 (real property) — buildings and structural components. Recapture is limited to the depreciation taken and taxed at a maximum 25%. This is "unrecaptured Section 1250 gain."
- Section 1245 (personal property) — equipment, appliances, fixtures, and the short-life components a cost segregation study carves out. Recapture here is taxed at ordinary income rates, which can be higher than 25%.
This is why accelerating depreciation through cost segregation, while powerful up front, can convert some future recapture into ordinary-income (1245) recapture — a tradeoff worth modeling before you sell.
How it's calculated
The unrecaptured Section 1250 gain is the lesser of:
- your total gain on the sale, or
- the total depreciation you claimed on the property.
That amount is taxed at up to 25%. Any gain above the depreciation is taxed as a regular long-term capital gain.
Worked example
You bought a rental for $300,000, claimed $50,000 in depreciation, and sold for $400,000. Your adjusted basis is $250,000 and your total gain is $150,000. The unrecaptured Section 1250 gain is the lesser of $150,000 (gain) or $50,000 (depreciation) = $50,000, taxed at 25% = $12,500. The remaining $100,000 is a long-term capital gain — at 15% that's $15,000. Total tax: $27,500. Run your own numbers in the depreciation recapture calculator.
Can you reduce it?
Yes — mainly by deferring it. A 1031 exchange defers the whole thing into a replacement property, and a step-up in basis at death can eliminate it for heirs. See the full list in our guide on how to avoid depreciation recapture.
Frequently asked questions
What is unrecaptured Section 1250 gain?
The part of your gain on selling depreciated real property equal to the depreciation you claimed, taxed at a maximum 25% rate.
Is it ordinary income?
No. Section 1245 recapture on personal property is ordinary income; unrecaptured Section 1250 gain is a special capital-gain category capped at 25%.
How is it calculated?
The lesser of your total gain or total depreciation claimed. Any gain above the depreciation is a regular long-term capital gain.
Educational information and estimates only. Not tax advice. Consult a qualified tax professional for your situation.