To calculate depreciation recapture, subtract your adjusted cost basis (original purchase price, plus improvements, minus all depreciation you claimed) from the sale price to find your total gain, then treat the lesser of that gain or your cumulative depreciation as recaptured income. For equipment and other personal property, that recaptured amount is taxed as ordinary income at rates up to 37%. For real estate depreciated on a straight-line basis, it becomes “unrecaptured Section 1250 gain,” taxed at a maximum of 25%. Anything you sell for above your original cost is a separate long-term capital gain taxed at 0%, 15%, or 20%. High earners may owe an additional 3.8% on top.
The Four Numbers You Need First
Every recapture calculation starts with four inputs: your original cost basis, the cost of any capital improvements, the total depreciation you claimed over the years, and the final sale price.
Original cost basis is the purchase price plus the costs you capitalized at acquisition, such as legal fees, commissions, sales tax, and recording fees.1Internal Revenue Service. Publication 551 (12/2025), Basis of Assets Capital improvements made during ownership get added to that figure.
Cumulative depreciation is the number most people struggle to pin down, and it’s the one that drives the tax. Pull it from the depreciation schedules attached to your prior returns, or from the records used to complete Form 4562 each year.2Internal Revenue Service. Instructions for Form 4562 (2025) If a preparer handled your returns, they should have retained this data. Missing depreciation records are where recapture calculations go sideways, so reconstruct them before you run any numbers.
The sale price comes off your closing statement or bill of sale. That’s it. With those four figures in hand, the rest is arithmetic.
The Basic Formula
Compute your adjusted cost basis first:
Original cost + improvements − total depreciation claimed = adjusted basis
Then find your realized gain:
Sale price − adjusted basis = total gain
That total gain splits into two pieces. The portion up to your total depreciation is recaptured. The portion above your original cost is a long-term capital gain. Which tax rate applies to the recaptured piece depends on whether the asset is equipment (Section 1245) or real property (Section 1250). That distinction changes everything downstream.
Calculating Recapture on Equipment and Vehicles
Equipment, machinery, vehicles, and other tangible business property fall under Section 1245 of the Internal Revenue Code. The rule is blunt: when you sell for more than adjusted basis, the lesser of your total gain or your total depreciation is taxed as ordinary income.3Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property Every dollar of depreciation you took comes back as ordinary income until either the gain is fully absorbed or the depreciation is fully recaptured, whichever comes first.
A worked example. You buy equipment for $80,000 and claim $30,000 of depreciation, leaving an adjusted basis of $50,000. You sell for $70,000. The realized gain is $20,000. Because total depreciation ($30,000) exceeds the gain ($20,000), the entire $20,000 is recaptured as ordinary income. Nothing qualifies as capital gain.
Change the sale price to $95,000 and the picture shifts. Realized gain is now $45,000. The first $30,000 (the full depreciation figure) is ordinary-income recapture. The remaining $15,000 sits above your original $80,000 cost and is taxed as a long-term capital gain. That split is why tracking the original purchase price matters as much as tracking depreciation.
If you used Section 179 expensing or bonus depreciation to write off the asset quickly, the math doesn’t change. All depreciation counts equally when you sell, regardless of the method that produced it.3Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property Front-loaded deductions mean a proportionally larger recapture bill on sale.
Calculating Recapture on Real Estate
Rental buildings, commercial structures, and other depreciable real property follow Section 1250.4Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty The key difference from equipment is that the depreciation portion of your gain generally isn’t taxed as ordinary income. It goes into a separate category called unrecaptured Section 1250 gain, which has its own rate ceiling.p>
Most real property placed in service after 1986 uses straight-line depreciation, spread over 27.5 years for residential rental or 39 years for commercial. Because straight-line is the required method, there’s typically no “excess” depreciation above what straight-line would have produced. The full depreciation portion of the gain lands in the Section 1250 category.
Suppose you buy a rental for $300,000 (excluding land), claim $75,000 in straight-line depreciation, and sell for $350,000. Adjusted basis is $225,000. Realized gain is $125,000. Of that, $75,000 is unrecaptured Section 1250 gain and $50,000 is a standard long-term capital gain. Reporting the two components separately on Schedule D is where filers commonly go wrong.
Older properties depreciated with an accelerated method play by harsher rules. The depreciation in excess of what straight-line would have allowed is recaptured as ordinary income, exactly like Section 1245 property.4Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty Only the straight-line-equivalent portion gets the 25% cap. This mainly affects buildings placed in service before 1987.
Tax Rates Applied to the Recaptured Amount
Once you know how much falls into each category, apply the rates:
- Section 1245 recapture on equipment, vehicles, and machinery is taxed as ordinary income at your marginal rate. For 2026, the top federal rate is 37% for single filers above $640,600 in taxable income and married couples filing jointly above $768,700. Recapture stacks on top of your wages, so a large asset sale can push you into a higher bracket.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- Unrecaptured Section 1250 gain on real estate is capped at 25%. If your ordinary bracket is lower, you pay the lower rate.
- Gain above your original cost is a long-term capital gain, taxed at 0%, 15%, or 20% based on taxable income.
The 3.8% Net Investment Income Tax
High-income taxpayers may owe an additional 3.8% net investment income tax on recapture gains. The NIIT applies when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).6Internal Revenue Service. Topic No. 559, Net Investment Income Tax These thresholds aren’t indexed for inflation, so more filers cross them every year.
The tax is calculated on the lesser of net investment income or the amount by which MAGI exceeds the threshold. A real estate investor pinned at the 25% cap could face an effective 28.8% on the depreciation portion. Someone selling equipment at the top ordinary bracket could face 40.8%.
Situations That Change the Calculation
Listed Property That Falls Below 50% Business Use
Certain assets the IRS classifies as “listed property,” including passenger vehicles and other items that lend themselves to personal use, carry an extra recapture trigger. If business use drops to 50% or less in any year after you claimed Section 179 or bonus depreciation, you have to recapture the excess deduction immediately, without any sale.7Internal Revenue Service. Publication 946 (2024), How to Depreciate Property
The excess is the difference between what you actually deducted (including Section 179 or bonus) and what straight-line depreciation over the longer alternative depreciation system recovery period would have produced. Report it on Form 4797, Part IV, in the year business use first fell below the threshold.
Installment Sales
Spreading payments over years doesn’t spread the recapture tax. All depreciation recapture is reported as income in the year of sale, even if no cash has arrived.8Internal Revenue Service. Publication 537, Installment Sales Only the gain above the recapture amount qualifies for installment treatment.
You agree to a five-year payment plan on a piece of equipment, expecting to recognize income gradually, and then find you owe tax on $50,000 of recapture before the first check clears. The recapture goes on Part II of Form 4797 for the sale year, and it also gets entered on Line 12 of Form 6252 so the installment calculation starts from the right number.9Internal Revenue Service. Installment Sale Income Form 6252
Home Office Depreciation on a Primary Residence
Homeowners who depreciated a home office face a recapture bill when they sell. The Section 121 exclusion, which shelters up to $250,000 in gain ($500,000 for joint filers) on the sale of a principal residence, does not cover gain attributable to depreciation claimed after May 6, 1997.10Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
If you claimed $12,000 of home-office depreciation over the years, that $12,000 is recaptured as unrecaptured Section 1250 gain taxed at up to 25%, even if the rest of your home-sale profit is fully excluded. The exclusion covers everything else. The depreciation still comes back.
Where to Report It
The forms depend on the asset and how you structured the sale:
- Form 4797, Part III is the primary form for Section 1245 and Section 1250 recapture on business property sales. It walks through the gain calculation and separates recapture income from capital gain.11Internal Revenue Service. 2025 Instructions for Form 4797 – Sales of Business Property
- Form 4797, Part IV handles recapture triggered by a drop in business use of listed property below 50%.
- Schedule D (Form 1040) is where unrecaptured Section 1250 gain flows for rate calculation.
- Form 6252 is required for installment sales, separating recapture income (reported in the sale year) from the remaining installment gain.9Internal Revenue Service. Installment Sale Income Form 6252
Form 4797 is filed with your annual return, so the deadline is the standard April 15 date (or October 15 with an extension). An election to opt out of installment treatment must be made on a timely filed return including extensions. Miss that window and the IRS defaults to installment treatment, which still requires full recapture recognition in year one.