Estimates use straight-line depreciation with no mid-month convention, treat the whole 25% as owed (it is a ceiling, and a lower ordinary bracket pays less), ignore passive-loss carryforwards, and are not tax advice. Your CPA's Form 4797 is the number that counts.
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How to calculate depreciation recapture on rental property
Depreciation recapture is the tax on the deductions you took while you owned the building. The arithmetic runs in five steps, and the calculator above follows the same order.
- Find the depreciable basis. Purchase price plus closing costs, minus the value of the land. Only the building and its improvements depreciate.
- Work out annual depreciation. Residential rental property is written off straight-line over 27.5 years; nonresidential property over 39 years. Building basis divided by the recovery period is the yearly deduction. The first and last years are prorated under the mid-month convention.
- Total the depreciation "allowed or allowable." Years owned times the annual amount, plus depreciation on any improvements. If you skipped the deduction in some years, the IRS still counts it, which is why the calculator lets you enter the true figure from your returns.
- Compute the gain on sale. Adjusted basis is purchase price plus improvements minus accumulated depreciation. Gain is the sale price minus selling costs minus adjusted basis.
- Split the gain and apply the rates. The part of the gain equal to your straight-line depreciation is unrecaptured Section 1250 gain, taxed at ordinary rates up to a maximum of 25%. The rest is long-term capital gain at 0%, 15% or 20%. Add the 3.8% net investment income tax if your income is above the threshold, and state tax if your state has one.
The formula in one line: recapture tax = min(depreciation taken, total gain) × up to 25%. If you sell for less than your adjusted basis there is no gain, so there is nothing to recapture.
A worked example
A duplex bought for $500,000 with $100,000 of land value, held ten years, sold for $700,000 with $42,000 of selling costs. The owner is in the 15% capital gains bracket and over the net investment income threshold.
| Step | Calculation | Amount |
|---|---|---|
| Depreciable basis | $500,000 − $100,000 land | $400,000 |
| Annual depreciation | $400,000 ÷ 27.5 | $14,545 |
| Depreciation taken | $14,545 × 10 years | $145,455 |
| Adjusted basis | $500,000 − $145,455 | $354,545 |
| Total gain | $700,000 − $42,000 − $354,545 | $303,455 |
| Unrecaptured §1250 gain tax | $145,455 × 25% | $36,364 |
| Capital gains tax | ($303,455 − $145,455) × 15% | $23,700 |
| Net investment income tax | $303,455 × 3.8% | $11,531 |
| Federal tax due | before state tax | $71,595 |
Almost half of that bill is depreciation recapture, on money the owner never received in cash. In New York the state adds its own tax on the full gain, which is why the calculator has a state field and the site keeps a state-by-state rate table.
Why 25% is a ceiling, not a flat rate
The tax code does not have a "25% recapture tax." Section 1(h)(1)(E) says unrecaptured Section 1250 gain is taxed at your ordinary income rates, but no higher than 25%. An investor whose taxable income, including the gain, stays in the 12% or 22% bracket pays that lower rate on the recaptured amount. Most sellers of appreciated rentals land in the 24% bracket or above once the gain is added, so 25% is the safe planning number, and it is what the calculator uses.
Two other rates hide behind the word "recapture":
- Section 1245 recapture at ordinary rates. If a cost-segregation study reclassified part of the building into 5, 7 or 15-year property and you took accelerated or bonus depreciation on it, that depreciation is recaptured as ordinary income with no 25% cap.
- Additional depreciation under Section 1250. Accelerated depreciation in excess of straight-line, rare on buildings placed in service after 1986, is also ordinary income.
Rental property depreciation: the annual deduction the recapture is based on
Because recapture is simply the reversal of past deductions, it helps to know how the deduction itself is set:
- Recovery period. 27.5 years for residential rental property (a building where at least 80% of gross rent comes from dwelling units) and 39 years for nonresidential property, straight-line, under the general depreciation system.
- Placed in service. Depreciation starts when the property is ready and available to rent, not when you bought it, and the first year is prorated by the mid-month convention.
- Land is excluded. Use the county assessor's land-to-building ratio or an appraisal to split the purchase price. A higher land share means less depreciation and less recapture.
- Improvements depreciate separately, each from its own placed-in-service date, and each adds to recapture when you sell.
- Allowed or allowable. If you never claimed depreciation, the IRS computes your gain as if you had. Form 3115 can catch up missed depreciation before a sale.
How to defer depreciation recapture
A 1031 exchange defers depreciation recapture along with the capital gain. Your adjusted basis and accumulated depreciation carry into the replacement property, and the recapture is not triggered until you sell for cash. Exchange again and it rolls again. Hold the last property until death and your heirs receive a stepped-up basis under current law, so the recapture is never paid.
Two things a 1031 does not do: it does not defer recapture on cash you take out of the exchange (boot), and it does not reset the depreciation clock. The carried-over basis keeps depreciating on its old schedule while only the new money buys a fresh 27.5 years. The 1031 exchange calculator shows both taxes side by side, and the article Depreciation recapture: the hidden 1031 tax saver walks through when recapture resurfaces.
The mistakes that change the number
- Assuming recapture only covers what you claimed. It covers what you were allowed to claim. Pull the depreciation schedules from every return since purchase.
- Depreciating the land. Land value of zero overstates both your past deductions and your recapture.
- Forgetting the 3.8% net investment income tax. Rental gains are investment income. Above $200,000 of modified adjusted gross income for a single filer or $250,000 married filing jointly, the surtax applies to the whole gain, recapture included.
- Ignoring cost segregation. Accelerated deductions on reclassified components come back as ordinary income under Section 1245, not at the 25% ceiling.
- Treating an installment sale as a recapture fix. Unrecaptured Section 1250 gain is recognized first as installment payments arrive, and Section 1245 recapture is recognized entirely in the year of sale.
- Counting on the home-sale exclusion. If you converted a home to a rental, the Section 121 exclusion never covers depreciation taken after May 6, 1997. That part is recaptured even when the rest of the gain is excluded.
Questions investors ask about depreciation recapture
What is depreciation recapture on rental property?
It is the tax the IRS collects, when you sell, on the depreciation deductions you took while you owned the building. For real estate the recaptured amount is called unrecaptured Section 1250 gain and is taxed at ordinary rates capped at 25%, separately from the rest of your capital gain.
How is depreciation recapture calculated?
Total the depreciation you were allowed on the building and its improvements, then compare it with your gain on sale (sale price minus selling costs minus adjusted basis). The smaller of the two is unrecaptured Section 1250 gain, taxed at up to 25%. Any gain above that amount is long-term capital gain at 0%, 15% or 20%.
Is depreciation recapture a flat 25% tax?
No. Under Section 1(h)(1)(E) it is taxed at your ordinary income rate, but never more than 25%. Sellers in a lower bracket pay less; most sellers of appreciated rentals reach the cap once the gain is added to their income, so 25% is the safe estimate.
What is unrecaptured Section 1250 gain?
The portion of your gain on depreciable real estate that equals the straight-line depreciation you took. It gets its own line on the Schedule D worksheet and its own 25% maximum rate. Gain beyond it is ordinary capital gain.
Do I owe recapture if I never claimed depreciation?
Yes. The rule is depreciation "allowed or allowable," so the IRS reduces your basis by the depreciation you could have taken even if you did not. Filing Form 3115 before the sale can claim the missed deductions so you at least get the benefit of them.
Do I pay depreciation recapture if I sell at a loss?
No. Unrecaptured Section 1250 gain cannot exceed your total gain. If the sale price after costs is below your adjusted basis, there is no gain and no recapture. Remember that adjusted basis is your cost minus depreciation, so a property can show a gain for tax purposes even if you sell it for less than you paid.
Does the 3.8% net investment income tax apply to depreciation recapture?
Yes, if your modified adjusted gross income is above $200,000 (single) or $250,000 (married filing jointly). The surtax applies to the entire gain on a rental sale, including the recaptured portion, on top of the 25% and capital gains rates.
How do you avoid depreciation recapture?
You defer it rather than avoid it. A 1031 exchange rolls the recapture and the capital gain into the replacement property with no tax due at the sale. Holding property until death eliminates it through the stepped-up basis. Installment sales spread the capital gain but not the Section 1245 portion, and charitable strategies have their own rules.
Does a 1031 exchange defer depreciation recapture?
Yes. When the exchange is fully deferred, both the capital gain and the unrecaptured Section 1250 gain carry into the replacement property through your carried-over basis. Any boot you receive is taxed first as recapture, then as capital gain.
Where is depreciation recapture reported?
The sale of a rental goes on Form 4797, Part III, which computes the Section 1250 amounts. The unrecaptured Section 1250 gain then flows to the Schedule D worksheet, where the 25% maximum rate is applied. An exchanged property is reported on Form 8824 instead.
Can I avoid recapture by moving into the rental and using the home-sale exclusion?
Only partly. After you live in the property as your main home for two of the five years before the sale, Section 121 can exclude up to $250,000 of gain ($500,000 married filing jointly), reduced for the years it was a rental after 2008. The exclusion never covers depreciation taken after May 6, 1997, so that amount is still taxed as unrecaptured Section 1250 gain.
Is recapture different for commercial property?
The mechanics are the same, but nonresidential buildings depreciate over 39 years instead of 27.5, so the same purchase price produces less annual depreciation and less recapture over the same holding period. Cost-segregated components are recaptured at ordinary rates under Section 1245 in both cases.
Sources
- 26 U.S.C. §1250: gain from dispositions of depreciable realty.
- 26 U.S.C. §1(h)(1)(E) and (h)(6): the 25% maximum rate on unrecaptured Section 1250 gain and its definition.
- 26 U.S.C. §1245: ordinary-income recapture on personal property and cost-segregated components.
- 26 U.S.C. §1411: the 3.8% net investment income tax and its thresholds.
- IRS Publication 544, Sales and Other Dispositions of Assets: Section 1250 and Section 1245 recapture rules.
- IRS Publication 527, Residential Rental Property: the 27.5-year recovery period, mid-month convention and the allowed-or-allowable rule.
- Instructions for Form 4797 and the Schedule D instructions (Unrecaptured Section 1250 Gain Worksheet).
Want the recapture deferred instead of paid?
If a sale is coming, a short call maps what a 1031 exchange would defer on your numbers and the deadlines that follow.
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