To calculate depreciation recapture on a rental property, figure out your total depreciation (what you claimed or were allowed to claim over the years you owned it), subtract that from your cost basis plus improvements to get your adjusted basis, subtract the adjusted basis from your net sale proceeds to get your total gain, and then the lesser of that total gain or your total depreciation is the amount taxed at the federal recapture rate of up to 25%. Anything above that piece is a regular long-term capital gain. The math is not complicated once you have the right numbers, but a few rules quietly change what those numbers should be.
The Five Numbers You Need
Before you calculate anything, pull these figures together:
- Original purchase price, including closing costs added to basis (title insurance, legal fees, recording fees, transfer taxes you paid as the buyer). Your closing disclosure has these.1Internal Revenue Service. Publication 523 (2025), Selling Your Home
- Land value, separated out from the building. Land isn’t depreciable. Most owners use the land-to-improvement ratio from the property tax assessment in the year of purchase, or a professional appraisal.
- Capital improvements — a new roof, HVAC replacement, an added bedroom, a kitchen remodel. Routine repairs don’t count. Each improvement has its own 27.5-year depreciation schedule starting when it was placed in service.
- Total depreciation claimed or allowable. Pull the annual amounts from your Form 4562 filings. If your records are thin, reconstruct using straight-line over 27.5 years.2Internal Revenue Service. About Form 4562, Depreciation and Amortization (Including Information on Listed Property)
- Selling expenses: real estate commissions, legal fees, advertising, transfer taxes paid as the seller. These reduce your amount realized.1Internal Revenue Service. Publication 523 (2025), Selling Your Home
The “Allowed or Allowable” Rule
One rule catches landlords off guard, and it directly affects the depreciation number you plug into the calculation. Federal law requires your property’s basis to be reduced by the greater of the depreciation you actually deducted or the amount you were entitled to deduct.3Office of the Law Revision Counsel. 26 U.S. Code 1016 – Adjustments to Basis If you owned a rental for ten years and never took a single depreciation deduction, the IRS still treats you as though you did.
So skipping depreciation on prior returns doesn’t shrink your recapture bill — it just means you missed the annual tax savings while still owing recapture on the sale. If you’ve been underclaiming, filing Form 3115 to catch up on missed deductions before you sell at least gets you the benefit the IRS is going to tax you on either way.
How Depreciation Accumulates
Residential rental property placed in service after 1986 is depreciated straight-line over 27.5 years under the Modified Accelerated Cost Recovery System.4Internal Revenue Service. Publication 527 (2025), Residential Rental Property Divide the depreciable basis (purchase price minus land, plus eligible closing costs) by 27.5 to get the annual amount.
Two details affect the total. First, a mid-month convention: you get half a month of depreciation for the month the property was placed in service and half a month for the month you sell.4Internal Revenue Service. Publication 527 (2025), Residential Rental Property A property put in service in October gets only 2.5 months of depreciation in year one. Second, each capital improvement runs on its own 27.5-year clock from the date it was completed, so a roof replaced in year five has its own accumulated depreciation figure separate from the building’s.
Step-by-Step Calculation
Here’s how the numbers assemble, using an example you can swap your own figures into.
The setup: you bought a rental for $300,000 ($250,000 building, $50,000 land). Over ten full years of ownership, you made $25,000 in capital improvements and took $100,000 in total depreciation ($275,000 depreciable basis ÷ 27.5 = $10,000 per year). You sell for $425,000 and pay $25,000 in selling expenses.
Step 1. Amount realized. Sale price minus selling expenses: $425,000 − $25,000 = $400,000.
Step 2. Adjusted basis. Original price plus improvements minus total depreciation: $300,000 + $25,000 − $100,000 = $225,000.
Step 3. Total gain. Amount realized minus adjusted basis: $400,000 − $225,000 = $175,000.
Step 4. Split the gain. The recapture portion is the lesser of the total gain or the total depreciation. Here that’s $100,000 (less than the $175,000 gain), taxed at up to 25%. The remaining $75,000 is long-term capital gain.
If your total gain had been smaller than your depreciation — say the property sold for $310,000 and produced a $60,000 gain — only $60,000 would be recaptured. The recapture piece can never exceed your actual profit.
How Each Slice of the Gain Is Taxed
The 25% Recapture Rate
For residential rental property depreciated straight-line, the depreciation-related gain is technically “unrecaptured Section 1250 gain” and is taxed at a maximum federal rate of 25%.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses If your ordinary rate is below 25%, you pay the lower rate. In the example above, the $100,000 recapture piece produces up to $25,000 in federal tax on its own.
Long-Term Capital Gains on the Rest
The remaining $75,000 is taxed at 0%, 15%, or 20% depending on your taxable income.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses Most sellers land in the 15% bracket, which adds $11,250 to the example bill.
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% Net Investment Income Tax on top of everything else. The NIIT applies once modified adjusted gross income exceeds $250,000 for married couples filing jointly or $200,000 for single filers.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax Both the recapture piece and the capital gain piece from a rental sale count as net investment income. The NIIT thresholds are not indexed for inflation.
State Income Tax
Most states with an income tax don’t give recapture any special treatment. The gain gets added to your state taxable income at your regular state rate. State rates run from zero in states without an income tax to above 13% at the top, so this layer is worth estimating before you sign a contract.
Where It Gets Reported
The sale goes on Form 4797, Sales of Business Property.7Internal Revenue Service. Instructions for Form 4797 (2025) Part III handles Section 1250 property; for straight-line residential rentals, the ordinary-income recapture in Part III is generally zero because you didn’t use accelerated depreciation.8IRS.gov. Form 4797 – Sales of Business Property The gain flows to Part I as Section 1231 gain and then to Schedule D of Form 1040.9Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses The unrecaptured Section 1250 gain taxed at up to 25% is computed on a worksheet in the Schedule D instructions.10Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) If NIIT applies, add Form 8960. The tax is due by the regular filing deadline for the year of sale.
Situations That Change the Answer
Moving Back in Before Selling
If you convert the rental to your primary residence and live there two of the last five years to claim the Section 121 exclusion, the exclusion does not cover depreciation recapture. Section 121(d)(6) specifically excludes gain attributable to depreciation taken after May 6, 1997.11Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence The $250,000 / $500,000 exclusion can shelter the capital gain piece, but you still owe up to 25% on every dollar of depreciation you claimed.
1031 Exchanges
A Section 1031 like-kind exchange defers both the capital gain and the unrecaptured Section 1250 gain by rolling the proceeds into another qualifying investment property. It’s a deferral, not forgiveness — the recapture carries forward through a reduced basis in the replacement property and comes due whenever you sell without exchanging again.
Installment Sales
If you finance the buyer over several years, the capital gain piece can be spread across the payments, but the IRS requires the full depreciation recapture to be reported in the year of sale regardless of how much cash you actually receive.12Internal Revenue Service. Publication 537 (2025), Installment Sales Sales to related persons generally can’t use installment treatment at all.
Suspended Passive Losses
Passive activity losses you couldn’t use in prior years are released when you sell in a fully taxable transaction to an unrelated buyer, and they can offset the gain from the sale, including the recapture piece.13Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules Check your prior returns before you close.
Inherited Property
If you inherited the property, the prior owner’s depreciation is wiped away. The heir takes a stepped-up basis equal to fair market value on the date of death, which eliminates the recapture attributable to any depreciation the decedent claimed. You start a fresh depreciation schedule from the stepped-up basis, and only what you claim from that point forward will be recaptured when you sell.
Getting the Number Wrong Is Expensive
Underreporting recapture — including by using the depreciation you actually claimed rather than the higher allowable amount — can trigger the 20% accuracy-related penalty on the underpaid tax.14Internal Revenue Service. Accuracy-Related Penalty Interest runs from the original due date on top of that. On a $25,000 recapture bill, that’s a $5,000 penalty before interest. The IRS treats both negligence and substantial understatement as grounds, so a careless mistake with a large dollar impact isn’t automatically excused.