When you sell a business asset or investment property you’ve been depreciating, the IRS makes you pay back part of the tax benefit those deductions gave you. That payback is called depreciation recapture, and it taxes the portion of your gain equal to prior depreciation at ordinary income rates for equipment and at a maximum 25% rate for real estate, rather than at the lower long-term capital gains rate. The rule applies only when you sell at a gain, and the recaptured amount is capped at the lesser of the depreciation you claimed or the gain on the sale.
Why the Tax Exists
Each year you depreciate an asset, you cut your taxable income by the deduction. You also lower the asset’s adjusted basis, which is the figure the IRS uses to measure gain when you sell. A lower basis means a larger gain, and recapture is the mechanism that taxes the part of that gain created by earlier deductions at a rate closer to what you saved when you took them.
If you sell for less than adjusted basis, there is nothing to recapture. If you claimed $50,000 in depreciation but realized only $30,000 in gain, recapture applies to $30,000. The recaptured amount can never exceed the gain.
How Much You’ll Pay Depends on What You Sold
Equipment and Other Personal Property (Section 1245)
Section 1245 covers tangible personal property such as machinery, vehicles, office furniture, and computers. Every dollar of prior depreciation gets taxed as ordinary income when you sell at a profit, up to the amount of your gain. There is no preferential rate; the recaptured amount lands in your marginal bracket, which can reach 37%.
Any gain above the depreciation claimed becomes a Section 1231 gain and qualifies for long-term capital gains rates if you held the property more than a year. Most equipment loses value fast enough that gains rarely exceed accumulated depreciation, so in practice nearly all the profit on a sold piece of equipment is taxed as ordinary income.
Real Estate (Section 1250)
Real property placed in service after 1986 must be depreciated straight-line, so there is no accelerated depreciation to recapture at ordinary rates. Instead, all of the straight-line depreciation you claimed becomes “unrecaptured Section 1250 gain,” taxed at a maximum federal rate of 25%. That figure is a ceiling: if your ordinary bracket is below 25%, you pay your bracket rate.
Gain beyond the total depreciation is taxed at your long-term capital gains rate. So a rental property sale splits into two buckets: the depreciation portion at up to 25%, and the appreciation portion at 0%, 15%, or 20%.
The 3.8% Net Investment Income Tax
Higher-income sellers face an extra layer. The Net Investment Income Tax adds 3.8% to gains from investment real estate when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. These thresholds are not indexed to inflation. With the NIIT, unrecaptured Section 1250 gain can reach an effective 28.8%, and the capital gains portion up to 23.8%.
A Worked Example
You bought a rental property for $350,000. Land was worth $50,000, leaving $300,000 in depreciable building. Over ten years, you claimed $109,080 in straight-line depreciation. Adjusted basis is now $240,920. You sell for $425,000.
- Total gain: $425,000 minus $240,920 = $184,080
- Recapture portion: $109,080, the full depreciation claimed, since it is less than the total gain
- Capital gain portion: $184,080 minus $109,080 = $75,000
The $109,080 is taxed at up to 25%. The $75,000 is taxed at your long-term capital gains rate. If your modified AGI clears the NIIT thresholds, add 3.8% to both amounts.
The same structure applies to equipment under Section 1245, except the recaptured piece is taxed at your full ordinary rate rather than capped at 25%.
Situations That Catch Sellers Off Guard
Bonus Depreciation and Section 179 Concentrate the Damage
Accelerated write-offs create a much lower adjusted basis than gradual depreciation, which enlarges recapture exposure when you sell.
The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. A business that deducts a $200,000 machine in full during year one and sells it three years later for $80,000 has $80,000 of ordinary income under Section 1245, because the entire purchase price was already deducted. Equipment placed in service during the prior phase-down (60% bonus in 2024, 40% in 2025) retains more basis and generates less recapture.
Section 179 behaves the same way. For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000, with a phase-out beginning at $4,090,000 in total equipment purchases. The full deduction counts as depreciation for recapture. If business use of Section 179 property or “listed property” (passenger vehicles rated 6,000 pounds or less, business aircraft, entertainment property) drops to 50% or below, recapture is triggered even without a sale: you must recapture the difference between what you deducted and what straight-line would have allowed.
Installment Sales Don’t Spread the Recapture
Sellers who finance a buyer often assume the recapture tax spreads across the payment years. It does not. Federal law requires you to recognize the entire depreciation recapture as ordinary income in the year of sale, no matter how little cash you actually collect that year. Only the gain above the recapture amount qualifies for installment reporting.
Sell a property with $100,000 in accumulated depreciation on a $50,000 down payment, and you owe tax on the full $100,000 of recapture that year. The remaining capital gain can be spread using Form 6252. Plan for the year-one tax hit before agreeing to seller financing.
A Primary Residence You Once Rented or Used for Business
The Section 121 exclusion lets you exclude up to $250,000 of gain, or $500,000 for joint filers, on the sale of a primary residence. It does not shelter gain attributable to depreciation taken after May 6, 1997.
If you rented out your home for five years before moving back in and claimed $45,000 in depreciation, that $45,000 is unrecaptured Section 1250 gain taxed at up to 25% when you sell, even if the rest of your profit fits inside the Section 121 exclusion. The IRS applies the rule on depreciation “allowed or allowable,” so forgetting to claim depreciation during the rental years does not spare you: recapture is calculated as if you had.
Home office depreciation follows the same rule. If the office was inside your home rather than in a separate structure, you don’t need to allocate the sale between business and personal portions, but you still can’t exclude the depreciation piece.
Ways to Defer or Eliminate Recapture
Section 1031 Like-Kind Exchange
A 1031 exchange lets you swap one investment or business property for another of equal or greater value and defer both capital gains and depreciation recapture. After the Tax Cuts and Jobs Act, 1031 treatment applies only to real property. Equipment and other personal property no longer qualify.
The deferral works because the replacement property carries over the old property’s basis. The recapture hasn’t disappeared; it’s waiting at the next sale. If you receive cash or non-like-kind property in the exchange (called “boot”), that portion becomes immediately taxable. Full deferral requires the replacement property to be of equal or greater value.
Hold Until Death
Property passing to an heir receives a stepped-up basis equal to fair market value on the date of death. The step-up eliminates the accumulated depreciation; the recapture obligation does not transfer to the heir. Combined with successive 1031 exchanges during life, this is how some real estate investors erase decades of deferred recapture permanently.
Gifting
Giving a depreciated asset away does not trigger recapture for the donor, but it does not eliminate the liability either. The recipient takes the donor’s adjusted basis and inherits the embedded recapture. When they sell, they pay the tax the donor would have owed. Gifting can help if the recipient is in a lower bracket, which reduces the total tax cost, but it does not make the tax go away.
Donating to Charity
Donating depreciated property to a qualified charity avoids triggering recapture as ordinary income, but the charitable deduction is reduced by the amount that would have been ordinary income on a sale at fair market value. Donate equipment with $30,000 of accumulated depreciation and a $50,000 fair market value, and your deduction is reduced by $30,000, leaving $20,000. You avoid the recapture tax; you also lose most of the charitable deduction.
Where This Shows Up on Your Return
Depreciation recapture is reported on Form 4797 (Sales of Business Property). Part III calculates the recapture; the ordinary income portion flows to Part II. Any gain beyond the recaptured amount on real property flows through Part I to Schedule D. The unrecaptured Section 1250 gain is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions. For installment sales, Form 6252 handles the deferred portion and feeds back into Form 4797 and Schedule D.