When you sell real estate you’ve been depreciating, the IRS reclaims the tax benefit of those deductions through a mechanism called Section 1250 depreciation recapture. The depreciation portion of your gain is reclassified as “unrecaptured Section 1250 gain” and taxed at a federal rate capped at 25%, rather than at the lower long-term capital gains rates of 0%, 15%, or 20%. Any profit above the total depreciation you claimed keeps its ordinary long-term capital gains treatment. High earners add a 3.8% surtax on top.
What Section 1250 Property Covers
Section 1250 applies to depreciable real property: buildings and their structural components such as roofs, HVAC systems, plumbing, and electrical wiring.1Office of the Law Revision Counsel. 26 U.S. Code 1250 – Gain From Dispositions of Certain Depreciable Realty Both residential rentals and commercial buildings qualify. Land is not depreciable, so it sits entirely outside these rules, which is why your original purchase price has to be allocated between land and building before any of this math works.
The depreciation that triggers recapture is the deduction you took each year under the Modified Accelerated Cost Recovery System: 27.5 years straight-line for residential rentals, 39 years straight-line for nonresidential commercial.2Internal Revenue Service. Publication 527 – Residential Rental Property Every dollar deducted reduced your taxable income in the year taken and reduced your property’s adjusted basis by the same amount. That lower basis is what produces the larger reported gain at sale.
How the Recapture Amount Is Calculated
You need three figures: your net selling price, your adjusted basis (original cost minus total depreciation claimed), and the total depreciation itself. Subtract the adjusted basis from the selling price to get your total realized gain.
The unrecaptured Section 1250 gain is then the lesser of two amounts: your total realized gain, or your total accumulated depreciation. Whichever is smaller gets the 25% rate. Anything above that falls into regular long-term capital gains treatment.
A worked example. You bought a commercial building (building value only) for $750,000 and claimed $150,000 of straight-line depreciation over your holding period, leaving an adjusted basis of $600,000. You sell for a net $900,000.
- Total realized gain: $900,000 − $600,000 = $300,000
- Unrecaptured Section 1250 gain: the lesser of $300,000 or $150,000, so $150,000, taxed at up to 25%
- Remaining long-term capital gain: $150,000, taxed at standard capital gains rates
Change the sale price to $650,000 and the math flips. Total gain is only $50,000, which is less than the $150,000 of depreciation claimed, so the entire $50,000 is unrecaptured Section 1250 gain taxed at the 25% ceiling. None of it gets the lower capital gains rates.
Sell for less than your $600,000 adjusted basis and there is no recapture because there is no gain. The loss is generally treated as an ordinary loss under Section 1231, which can offset other income.3Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
The Tax Rate on the Recaptured Portion
The 25% figure is a maximum federal rate, set by IRC Section 1(h).4Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed If your overall taxable income puts you in a marginal bracket below 25%, you pay the lower marginal rate on the unrecaptured gain. Most investors selling appreciated real estate have enough income in the sale year for the 25% cap to be the rate they actually pay.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
One narrow exception produces a worse result. Properties placed in service before 1987 could be depreciated using accelerated methods that front-loaded larger deductions. The amount by which that accelerated depreciation exceeded straight-line, called “additional depreciation” in the statute, is recaptured as ordinary income at your full marginal rate rather than at the 25% ceiling.1Office of the Law Revision Counsel. 26 U.S. Code 1250 – Gain From Dispositions of Certain Depreciable Realty For any property placed in service in 1987 or later, depreciation is required to be straight-line, so there is no additional depreciation and no ordinary-income layer.
The 3.8% Net Investment Income Surtax
High-income sellers owe another layer. The net investment income tax under IRC Section 1411 adds 3.8% to capital gains, rental income, and other investment income when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.6Internal Revenue Service. Net Investment Income Tax Both the unrecaptured Section 1250 gain and the remaining long-term capital gain count as investment income.
For a seller at the 25% recapture ceiling who also owes the surtax, the effective federal rate on the recapture piece reaches 28.8%. The remaining capital gain portion can run to 23.8% (20% plus 3.8%). State income tax is additional.
Where Section 1245 Takes Over Instead
Not everything inside a building is Section 1250 property. Personal property and certain land improvements fall under Section 1245, which recaptures the entire depreciation-related gain as ordinary income at your full marginal rate, with no 25% cap. Appliances, carpeting, cabinetry, parking lot paving, and landscaping typically qualify as Section 1245 property.
This matters most if you ran a cost segregation study during the holding period. Cost seg reclassifies building components into shorter 5, 7, or 15-year depreciation lives for faster deductions, but at sale those same reclassified items face full ordinary-income recapture under Section 1245 rather than the 25% Section 1250 treatment. The up-front benefit and the exit-year cost should be modeled together before the strategy is adopted.
Installment Sales Don’t Spread the Recapture
Spreading a sale across multiple tax years through an installment contract does not spread the recapture tax. The IRS requires the full depreciation recapture to be recognized in the year of sale, even if you receive only a small down payment that year.7Internal Revenue Service. Topic No. 705, Installment Sales
On Form 6252, recapture income from Form 4797 is folded into the gross profit calculation, with any ordinary income recapture identified separately on line 25.8Internal Revenue Service. Form 6252, Installment Sale Income Only the remaining capital gain portion is eligible for installment deferral. If you are structuring a seller-financed deal on depreciated property, budget for the entire recapture bill in year one regardless of what you collect.
Ways to Defer or Erase the Recapture
A few transactions let you avoid writing the recapture check immediately. Only one actually eliminates the liability.
Section 1031 Like-Kind Exchanges
A properly structured exchange of one investment or business real property for another defers all gain, including the depreciation recapture portion.9Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment Since the Tax Cuts and Jobs Act, only real property qualifies. The replacement property takes a reduced carryover basis that preserves the deferred recapture, so when you eventually sell in a taxable transaction, the accumulated depreciation from both properties feeds into the recapture math.
If you receive boot in the exchange (cash, debt relief, or non-like-kind property), gain is recognized up to the value of that boot, and the recapture rate applies first. Receive $50,000 of boot while sitting on $80,000 of unrecaptured Section 1250 gain, and the full $50,000 is taxed at the 25% recapture rate.
Holding Until Death
Inherited property receives a stepped-up basis to fair market value on the date of the owner’s death.10Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent That step-up permanently erases every dollar of accumulated depreciation. An investor who claimed $200,000 of depreciation on a property worth $1 million at death leaves heirs with a $1 million basis and zero recapture liability. This is the only common transaction that eliminates the recapture rather than deferring it.
Lifetime Gifts
Giving property away during life is not a sale, so no recapture is triggered. But the recipient takes your adjusted basis and your depreciation history, not a stepped-up basis.11Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust When they sell, they owe the recapture you would have owed. The liability travels with the property.
Involuntary Conversions
If the property is destroyed, condemned, or stolen and you reinvest the proceeds into similar replacement property within the required period, gain and recapture are deferred, with the deferred amount preserved in a reduced basis in the replacement. Keep the proceeds instead and recapture applies to the recognized gain.
How to Report It
The calculation starts on Form 4797, Sales of Business Property. Part III of that form handles Section 1250 recapture, separating any ordinary income recapture (the pre-1987 “additional depreciation” layer) from the rest of the gain.12Internal Revenue Service. Instructions for Form 4797 For post-1986 straight-line property, that ordinary-income line is zero.
The 25% calculation itself happens on the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D of Form 1040. The resulting figure flows to line 19 of Schedule D and feeds the final tax calculation.13Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) If you receive a Schedule K-1 from a partnership, S corporation, or trust, or a Form 1099-DIV from a REIT or mutual fund that passes through unrecaptured Section 1250 gain, those amounts belong on the same worksheet.