What is depreciation recapture?

Depreciation recapture is a tax provision that requires you to pay tax on the depreciation deductions you claimed on a property or asset when you sell it at a gain. The IRS considers the depreciation deductions to have reduced your cost basis, so when you sell, it recaptures the tax benefit you received. For rental property, unrecaptured Section 1250 gain is taxed at a maximum 25% rate. For business equipment and vehicles, Section 1245 recapture is taxed at ordinary income rates.

What is the depreciation recapture tax rate?

The tax rate depends on the type of asset. For residential and commercial real estate (Section 1250 property), unrecaptured depreciation is taxed at a maximum rate of 25% but no higher than your actual long-term capital gains rate. For business equipment, machinery, and vehicles (Section 1245 property), all recaptured depreciation is taxed at your ordinary income tax rate, which can be as high as 37%.

Can a 1031 exchange avoid depreciation recapture?

Yes. A properly structured 1031 like-kind exchange allows you to defer depreciation recapture along with capital gains by reinvesting the proceeds in a qualifying replacement property within the IRS-required timeframe. The deferred gain and recapture carry over to the replacement property basis and may be deferred indefinitely as long as you continue doing 1031 exchanges. At death, heirs may receive a stepped-up basis that eliminates the deferred recapture.

Do I have to pay depreciation recapture if I did not claim depreciation?

In most cases, yes. The IRS requires depreciation recapture based on depreciation that was allowed or allowable, meaning the depreciation you were entitled to claim, whether or not you actually claimed it. If you did not claim depreciation deductions you were entitled to, you may need to file an amended return or obtain IRS approval before selling. Consult a CPA before selling a property where depreciation was not claimed.

What is the Net Investment Income Tax on depreciation recapture?

The Net Investment Income Tax (NIIT) is a 3.8% surtax on net investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Gain from selling real property, including the depreciation recapture portion, is generally subject to NIIT. This means high-income sellers may pay an additional 3.8% on top of the Section 1250 rate and long-term capital gains rate.

Depreciation Recapture Calculator

Run the Numbers

Asset Type

Determines whether Section 1250 (real property, max 25%) or Section 1245 (equipment/vehicle, ordinary income) recapture applies.

Original Purchase Price

Cost basis at acquisition before improvements.

Capital Improvements Since Purchase

Permanent improvements (roof, HVAC, addition, kitchen). Not repairs. Added to your basis.

Accumulated Depreciation Claimed

Total depreciation deductions taken across all prior tax years. Find on Schedule E or Form 4562.

Sale Price (Gross)

Gross sale price before commissions and closing costs.

Selling Costs

Realtor commission, title fees, transfer taxes, closing costs. Typically 5-6% of sale price.

Filing Status

Determines your LTCG rate bracket and NIIT threshold.

Other Income This Year (Excluding Sale)

Wages, business income, other rental income. Excludes this sale. Used to determine LTCG bracket and NIIT.

Bonus Depreciation Claimed on Any Component?

TCJA bonus depreciation on appliances, carpeting, or qualified improvement property may be recaptured at ordinary income rates (Section 1245), not the capped 25% Section 1250 rate.

State Income Tax Rate on Ordinary Income

Depreciation recapture is taxed as ordinary income at the state level. CA: 13.3%. TX, FL, WY, NV: 0%. Most states: 3-10%.

Equipment / Vehicle Additional Inputs

Section 179 Deduction Taken

If you expensed this asset under Section 179 in the year of purchase, enter that amount. Fully recaptured at ordinary income rates if sold before end of recovery period.

Depreciation Method

MACRS Recovery Period

Reference for estimating depreciation if you do not have your exact total from tax records.

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Depreciation Recapture Field Guide

Why this calculation matters

Depreciation recapture is the tax nobody sees coming. Every year you held that rental property, you claimed depreciation deductions that reduced your taxable income. That was the benefit. The cost is deferred: when you sell, the IRS recaptures those deductions as taxable gain -- and at a rate that can exceed the standard long-term capital gains rate.

For a property sold after 10-15 years of ownership, depreciation recapture alone can add $20,000-$80,000 to a tax bill that the owner estimated purely on the capital gain. This calculator shows each component separately so you know exactly which number to plan around.

Section 1250 vs Section 1245 -- the core distinction

Section 1250 (real property). Depreciation on residential rental property and commercial real estate is recaptured as "unrecaptured Section 1250 gain." The federal rate is capped at 25% -- but it is also capped at your actual long-term capital gains rate if that rate is lower. A taxpayer in the 15% LTCG bracket pays 15% on Section 1250 recapture, not 25%. The 25% is a ceiling, not a flat rate.

Section 1245 (equipment and vehicles). Depreciation on business equipment, machinery, computers, vehicles, and most personal property is recaptured as ordinary income -- no 25% cap. If your ordinary income rate is 37%, Section 1245 recapture is taxed at 37%. This is why equipment sellers often face a larger tax surprise than real estate investors on a percentage basis.

The NIIT layer -- the second surprise

The Net Investment Income Tax (IRC §1411) adds 3.8% on top of the above for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). The gain from selling investment real estate, including the Section 1250 recapture portion, is generally subject to NIIT. In the default scenario above, the seller's combined income ($90,000 wages + $205,000 gain) puts them $45,000 above the married threshold -- triggering roughly $1,700 in NIIT on top of the federal and state bill.

The "allowed or allowable" trap

Here is one of the most common CPA calls: a property owner who never claimed depreciation discovers they still owe recapture tax. The IRS requires recapture based on depreciation that was "allowed or allowable" -- meaning the amount you were entitled to claim, whether or not you actually claimed it. If you have a rental property and your tax returns show no depreciation deductions, that is a problem to fix before you close, not after. A CPA can file amended returns or handle the basis correction. Ignoring it does not make it go away at sale.

Alternatives to paying it all at once

1031 like-kind exchange. A properly structured exchange under IRC §1031 defers the entire recapture bill -- including the Section 1250 portion -- by rolling all proceeds into a qualifying replacement property. The gain and recapture carry forward to the new property's basis. If you die still holding the replacement property, heirs receive a stepped-up basis, potentially eliminating the deferred tax entirely.

Installment sale (IRC §453). If a 1031 is not available, an installment sale spreads gain recognition over multiple years, reducing the portion taxable in any single year. NIIT and the Section 1250 rate still apply, but the tax burden is distributed.

Opportunity Zone investment. Investing the gain in a Qualified Opportunity Fund within 180 days can defer recognition and potentially exclude a portion of future appreciation (IRC §1400Z-2). An advanced strategy for large gain scenarios.

Estate planning note. If you inherit a property with a large depreciation schedule, the step-up in basis eliminates both the capital gain and the recapture exposure at the date of death. This is a meaningful consideration in estate planning for real estate investors.

Cost segregation and higher recapture

Properties that had a cost segregation study done will have significantly higher accumulated depreciation than the standard 27.5-year straight-line calculation -- because certain building components (lighting, flooring, certain systems) are classified as 5-year or 15-year property under MACRS and depreciated much faster. More accelerated depreciation means more recapture exposure at sale. If your property had a cost seg study, your accumulated depreciation from your tax records is the correct input -- not the simple purchase price formula in the estimation helper.

When to consult a CPA

This calculator estimates a number. It does not account for passive activity loss carryforwards (IRC §469), installment sale elections, AMT interaction, state-specific recapture rules that differ from federal, or properties held in complex entity structures. If your estimated tax bill is above $25,000, the difference between a good and a mediocre tax strategy is larger than the cost of a consultation. Use this number to know the order of magnitude, then call a CPA who handles real estate dispositions.

Methodology

This calculator applies IRC §1250 and §1245 recapture formulas in six steps: (1) adjusted basis (purchase + improvements - accumulated depreciation), (2) realized gain (net proceeds - adjusted basis), (3) recapture allocation (Section 1250 for real property, capped at max 25% and capped at the taxpayer's LTCG rate if lower; Section 1245 for equipment/vehicles at ordinary income rates), (4) long-term capital gains on remaining gain per IRC §1(h), (5) NIIT at 3.8% per IRC §1411 on lesser of NII or excess MAGI over threshold, (6) state income tax on recapture portion at user-entered rate.

Formula constants are flagged [CALEB-VERIFY-NEEDED] in EXPERT_GROUND_TRUTH.md for primary-source verification before production use.

Sources

IRC §1250 -- Gain from Dispositions of Certain Depreciable Realty (25% cap on unrecaptured Section 1250 gain)
IRC §1245 -- Gain from Dispositions of Certain Depreciable Property (ordinary income recapture)
IRC §1(h) -- Maximum Capital Gains Rates (0%, 15%, 20% LTCG brackets)
IRC §1411 -- Net Investment Income Tax (3.8% NIIT)
IRS Publication 544 (2025) -- Sales and Other Dispositions of Assets
IRS Schedule D Instructions (2025) -- Unrecaptured Section 1250 Gain Worksheet
IRC §1031 -- Like-Kind Exchange (deferral alternative)
IRC §453 -- Installment Method (alternative to lump-sum recognition)

This calculator is part of FigureNerd's Real Estate Tax Toolkit: