What Is Recapture: Depreciation, Section 1245, and Section 1250

Recapture in taxes is the IRS’s process for taking back tax benefits you previously claimed — usually depreciation deductions or tax credits — when a later event shows those benefits were larger than warranted. In practice, this usually means selling a business asset for more than its depreciated value, letting business use of an asset fall below a required threshold, or disposing of property tied to a credit before its holding period ends. When any of those happens, part of what would otherwise be a capital gain gets taxed at higher ordinary-income rates, or a portion of a prior credit is added back to your tax bill.

Why Depreciation Triggers Recapture

Depreciation lets you write off the cost of a business asset over its useful life, lowering your taxable income each year. Every dollar you deduct reduces what the IRS considers your investment in the asset — a figure called your adjusted basis. If the asset later sells for more than that reduced basis, the profit is at least partly the result of those earlier deductions rather than a real increase in value.

Recapture corrects that mismatch. Instead of letting you convert ordinary-income deductions into lower-taxed capital gains, the tax code requires you to report the depreciation-related portion of the gain as ordinary income. Any remaining profit above your original cost is taxed at capital-gains rates. The specific rules depend on what kind of asset you sold.

Personal Property Versus Real Estate

The two big categories work differently, and the tax rates that apply are not the same.

Section 1245: Equipment, Vehicles, and Other Personal Property

Tangible personal property used in a business — machinery, office furniture, vehicles, computer equipment, and similar items — falls under Section 1245 of the Internal Revenue Code. When you sell one of these assets at a gain, the entire gain up to the total depreciation you claimed is taxed as ordinary income at your regular rate, not at the preferential long-term capital-gains rate.¹

Suppose you buy a $50,000 piece of equipment and claim $30,000 in depreciation, bringing your adjusted basis to $20,000. If you sell it for $35,000, your $15,000 gain sits entirely inside the $30,000 you previously deducted, so the full $15,000 is Section 1245 ordinary income. Only gain that exceeds your original purchase price would qualify for capital-gains treatment.

Section 1250: Buildings and Real Estate

Buildings and structural improvements follow a different rule. Land itself cannot be depreciated and never triggers recapture. Structures are depreciated over 27.5 years for residential rental property or 39 years for commercial buildings.²

When you sell a building, the depreciation you claimed is taxed as “unrecaptured Section 1250 gain” at a maximum rate of 25 percent. That is higher than the standard long-term capital-gains rates of 0, 15, or 20 percent, but lower than the ordinary rates that hit Section 1245 property.³ Any gain above your original purchase price is taxed at the regular long-term capital-gains rate.

Common Events That Trigger Recapture

Selling a depreciated asset at a gain is the classic trigger, but it is not the only one.

Business Use Drops Below 50 Percent

Accelerated write-offs like Section 179 expensing and bonus depreciation let you deduct most or all of an asset’s cost in the year you place it in service. Section 179 fully deducts qualifying equipment up front,⁴ and under the One, Big, Beautiful Bill signed in 2025, qualifying property acquired after January 19, 2025, is eligible for a permanent 100 percent first-year bonus deduction.⁵

If business use of the asset later drops to 50 percent or less, you have to recapture the portion of the deduction that exceeds what straight-line depreciation would have allowed. This is especially common with “listed property” — passenger vehicles, cell phones, and other assets often used for both business and personal purposes. You report the recapture on Part IV of Form 4797.² And if you sell an asset you expensed under Section 179 or bonus depreciation at a gain, the full amount you deducted is subject to ordinary-income recapture under Section 1245.¹

Home Offices and Property Converted to a Rental

If you claimed depreciation on a home office or rented part of your home, that depreciation cannot be sheltered by the Section 121 home-sale exclusion (up to $250,000 for single filers or $500,000 for married couples filing jointly). Depreciation claimed, or that you were entitled to claim, after May 6, 1997, must be recaptured as ordinary income when you sell.⁶

If you used a room as a home office for ten years and claimed $15,000 in depreciation, at least $15,000 of your gain becomes recapture income taxed at up to 25 percent, even if the rest of the home’s gain is entirely excluded. Homeowners who convert a residence to a rental face the same issue on all depreciation taken during the rental period.

Credits With Holding-Period Requirements

Some tax credits get clawed back if you fail to meet their holding-period or use rules. Investment credits claimed on Form 3468 — including energy credits for solar, wind, and other qualifying projects — require the property to stay in qualified service for five full years, and disposing of it earlier means repaying a percentage of the original credit based on how long you held it.⁷ You calculate the amount on Form 4255.⁸ Low-Income Housing Tax Credit investors face recapture if the building’s qualified basis drops during a 15-year compliance period.⁹ The recaptured credit is added directly to your tax liability for the year of the disqualifying event.

Ways to Defer or Avoid Recapture

Two provisions can push recapture out of the current year, or eliminate it entirely.

A Section 1031 like-kind exchange lets you swap one piece of investment or business real estate for another without immediately recognizing gain, including the depreciation recapture portion. Since the Tax Cuts and Jobs Act of 2017, these exchanges are limited to real property; you cannot use a 1031 exchange to defer recapture on equipment or vehicles.¹⁰ To defer the full amount, the replacement property must be of equal or greater value, must also be depreciable, and must be held for business or investment use. Any cash or non-like-kind property you receive in the exchange is called “boot,” and the recapture portion of the gain is recognized first up to the boot amount.¹¹ The exchange is reported on Form 8824.

Inheritance eliminates recapture in a different way. When a property owner dies, the asset’s tax basis resets to fair market value on the date of death under Section 1014 — the stepped-up basis.¹² The gap between the depreciated basis and the current value disappears, so an heir who sells shortly after inheriting the property owes little or no recapture.

How to Calculate the Recaptured Amount

The math takes three steps:

Start with your original cost basis: the purchase price plus closing costs, legal fees, and any capital improvements.
Subtract total depreciation claimed, including Section 179 and bonus depreciation. The result is your adjusted basis.
Compare that adjusted basis to the net sale price (gross price minus selling expenses like commissions and transfer taxes). The difference is your total gain.

Then split the gain in two. Gain up to the depreciation you claimed is the recapture amount, taxed as ordinary income for Section 1245 property or at up to 25 percent for Section 1250 real estate. Gain above your original cost basis is a standard capital gain, taxed at long-term rates if you held the asset more than a year.

An example: you buy a commercial building for $400,000, with $100,000 allocated to land and $300,000 to the structure. Over the years you claim $80,000 in depreciation, giving an adjusted basis of $320,000. Sell for $450,000 after expenses, and your total gain is $130,000. Of that, $80,000 is unrecaptured Section 1250 gain taxed at up to 25 percent, and the remaining $50,000 is a long-term capital gain.³

Because land does not depreciate, a clean split between land value and building value matters. An independent appraisal at the time of sale supports the allocation. Without documentation, the IRS may challenge it.

Reporting Recapture on Your Return

Depreciation recapture on business assets is reported on Form 4797, Sales of Business Property. Part III handles Section 1245 and Section 1250 gains, separating the ordinary-income portion from any capital gain.¹³ The results flow to Schedule D and Form 1040 so each piece of the gain is taxed at the right rate. Credit recapture follows separate forms: Form 4255 for investment credits, Form 5405 for First-Time Homebuyer Credit repayment, and Form 8824 for like-kind exchanges.⁸

Keep detailed records of every depreciation schedule, improvement receipt, and appraisal. If the IRS finds a mismatch between the depreciation you claimed on prior returns and the recapture you report at sale, you may receive a CP2000 notice.¹⁴ Underreporting recapture income can also trigger an accuracy-related penalty of 20 percent of the underpaid tax.¹⁵

1
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
2
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
3
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
4
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
5
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
6
Internal Revenue Service. Selling Your Home
7
Internal Revenue Service. Instructions for Form 3468 (2025)
8
Internal Revenue Service. Instructions for Form 4255 (Rev. December 2025)
9
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
10
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use in a Trade or Business or for Investment
11
Internal Revenue Service. 2025 Instructions for Form 8824 – Like-Kind Exchanges
12
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
13
Internal Revenue Service. Instructions for Form 4797 (2025)
14
Internal Revenue Service. Understanding Your CP2000 Series Notice
15
Internal Revenue Service. Accuracy-Related Penalty