What Is Recaptured Depreciation? Section 1245, 1250, and Rates

Recaptured depreciation is the part of your gain on the sale of a business or investment asset that the IRS taxes at higher rates because you previously wrote off that same amount through depreciation deductions. For equipment and other personal property, the recaptured portion is taxed as ordinary income at rates up to 37%. For real estate, it’s capped at 25% on the depreciation portion of the gain. The rules and rates depend on what kind of asset you sold, how you disposed of it, and in some cases, whether you sold it at all.

How Depreciation Turns Into a Future Tax Bill

Every depreciation deduction you claim does two things. It lowers your taxable income in the year you take it, and it lowers the asset’s adjusted basis for the future. Adjusted basis is your original purchase price minus all the depreciation claimed against it.

When you sell, your taxable gain is measured from that reduced basis, not from what you originally paid. The wider the gap between sale price and adjusted basis, the larger the gain. The IRS treats the depreciation deductions as a timing benefit you’ve now outgrown, and it wants that benefit back. The amount subject to recapture is capped at the lesser of the total depreciation you claimed or the total gain on the sale. Any gain above the depreciation you took is treated as a regular capital gain.

Two Code sections do the heavy lifting. Section 1245 governs equipment and other tangible personal property. Section 1250 governs real estate. The rate you pay turns on which one applies.

Section 1245: Full Ordinary Income Rates on Equipment

Section 1245 covers vehicles, computers, machinery, office furniture, and certain building components that qualify as personal property rather than structural elements.¹ It also reaches amortizable intangibles under Section 197, such as goodwill, patents, and customer lists.²

The rule is blunt. Every dollar of depreciation you previously deducted is taxed as ordinary income on sale, up to the amount of your gain. Tax professionals call this full recapture. Only gain above the total depreciation claimed gets the lower long-term capital gains rate.

Take a $100,000 machine on which you claimed $60,000 of depreciation. Your adjusted basis is $40,000.

Sold for $70,000, your gain is $30,000, and the entire $30,000 is ordinary income because it falls within the $60,000 of depreciation claimed.
Sold for $110,000, your gain is $70,000. The first $60,000 is ordinary income. The remaining $10,000 is a Section 1231 gain eligible for long-term capital gains rates.

The rate gap is sharp. Ordinary income rates reach 37% in 2026, while long-term capital gains top out at 20% for most taxpayers.³ Deductions you took under accelerated methods, including bonus depreciation and Section 179 expensing, are fully subject to the same ordinary income recapture.¹

Section 1250: The 25% Cap on Real Estate

Real property used in business or held for investment falls under Section 1250. That means residential rentals, commercial buildings, and structural improvements. Since 1987, straight-line depreciation has been required on real estate, and that history is why the recapture treatment is gentler than on equipment.

When you sell real property at a gain, the depreciation portion is taxed at a maximum rate of 25%, not at ordinary income rates.⁴ The IRS calls this “unrecaptured Section 1250 gain.” It sits between the standard long-term capital gains rates of 0%, 15%, or 20% and the full ordinary income rates applied to Section 1245 property.⁵

Say you bought a rental for $500,000 (excluding land) and claimed $100,000 of straight-line depreciation, leaving an adjusted basis of $400,000. You sell for $550,000, realizing a $150,000 gain.

The first $100,000 is unrecaptured Section 1250 gain, taxed at a maximum of 25%.
The remaining $50,000 is a standard long-term capital gain, taxed at 0%, 15%, or 20% depending on income.

The 25% figure is a ceiling, not a flat rate. Lower-bracket sellers may pay less. Higher-bracket sellers who would otherwise face 32% or 37% on the same dollars benefit most from the cap.

The 3.8% Net Investment Income Tax

Higher-income sellers of investment real estate face an additional 3.8% Net Investment Income Tax when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).⁶ Those thresholds are not indexed for inflation.

The NIIT stacks on top of the regular rate. An investor selling a rental can face 25% plus 3.8% for an effective 28.8% on the depreciation portion, and up to 23.8% on the remaining capital gain.⁷

The Home Office Trap

Homeowners who claim a home office deduction often get surprised at closing. The Section 121 exclusion that shelters up to $250,000 (or $500,000 for joint filers) of gain on a primary residence does not cover depreciation. Any depreciation you claimed after May 6, 1997 must be recaptured, even if the rest of your gain is fully excluded.⁸

The recaptured amount is unrecaptured Section 1250 gain taxed at the 25% maximum. Worse, the IRS applies an “allowed or allowable” standard, meaning depreciation you were entitled to claim but never actually deducted still counts against you on sale.⁸

Recapture Without a Sale

You don’t always need to sell to trigger recapture. For “listed property” under Section 280F, including vehicles and other transportation equipment, recapture kicks in when qualified business use drops to 50% or below after the year the asset was placed in service.⁹

When that happens, you must include “excess depreciation” in gross income for that year. Excess depreciation is the difference between what you actually claimed (including any bonus depreciation or Section 179 expensing) and what the slower Alternative Depreciation System would have allowed. From that point forward, remaining depreciation on the asset must use the Alternative Depreciation System.⁹

This rule bites hardest on vehicles where someone claimed a large first-year deduction and then cut back on business use a year or two later. No sale, but a real tax bill.

Ways to Defer or Eliminate Recapture

Like-Kind Exchanges

A Section 1031 exchange lets you defer gain, including depreciation recapture, when you swap one piece of real property for another of like kind.¹⁰ Your depreciation history carries over to the replacement property’s basis, which defers rather than erases the eventual recapture.

Since 2018, Section 1031 applies only to real property. Equipment, vehicles, artwork, patents, and other personal or intangible property no longer qualify.¹¹ If you receive “boot” (cash, debt relief, or other non-like-kind property), gain is recognized up to the boot amount, and that gain is ordinary income up to the potential recapture.¹²

Holding Until Death

Death is the one event that permanently eliminates depreciation recapture rather than deferring it. Under Section 1014, an heir receives a stepped-up basis equal to the property’s fair market value on the date of death.¹³ All the depreciation the decedent claimed is wiped out for recapture purposes. If the heir later depreciates the property and sells, only their own depreciation is subject to recapture.

A series of 1031 exchanges during life followed by a step-up at death can defer recapture for decades and then end it entirely.

Installment Sales Don’t Spread Recapture

If you sell on an installment plan expecting to spread the tax hit, the recapture piece doesn’t cooperate. The IRS requires you to recognize the full recapture amount as ordinary income in the year of sale, even if you haven’t collected most of the cash yet.¹⁴ The statute treats recapture income as the total that would be ordinary under Sections 1245 or 1250 if every payment arrived immediately.¹⁵

Only the gain above the recapture amount can be reported under the installment method. The mismatch between tax owed and cash in hand is worth planning for before signing.

Gifts and Charitable Contributions

Giving the asset away does not trigger recapture at the time of the gift. The recipient inherits your adjusted basis and your depreciation history, so the recapture liability travels with the asset and comes due when they sell.

Donating depreciable property to charity doesn’t trigger a recapture bill either, but your charitable deduction is generally limited to adjusted basis rather than full fair market value when the property would have produced ordinary income on sale.¹⁶ The recapture gets baked into a smaller deduction.

Involuntary Conversions

If property is condemned or destroyed, the resulting gain can include a recapture component, but reinvesting the insurance or condemnation proceeds into qualified replacement property within the required timeframe defers recognition of the entire gain, recapture included.

Reporting Recapture on Your Return

Whether you’re dealing with Section 1245 or Section 1250 property, the paperwork starts with Form 4797.

Form 4797, Part III calculates the recapture amount for both Section 1245 and Section 1250 property using original cost, accumulated depreciation, and sale price.¹²
Form 4797, Part II receives the ordinary income recapture from Part III and carries it to Form 1040.
Schedule D and the Unrecaptured Section 1250 Gain Worksheet handle the real estate side. The depreciation portion flows to Schedule D, line 19, and the Schedule D Tax Worksheet applies the 25% maximum rate.¹⁷

Installment sellers use Form 6252 for the installment reporting, but the recapture piece still appears in full on Form 4797 in the year of sale.¹⁴ Taxpayers above the NIIT thresholds also file Form 8960 to calculate the 3.8% surtax.⁶

1
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
2
eCFR. 26 CFR 1.197-2 – Treatment of Amortizable Section 197 Intangibles
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
5
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
6
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
7
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
8
Internal Revenue Service. Publication 523 – Selling Your Home
9
Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles
10
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
11
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
12
Internal Revenue Service. Instructions for Form 4797
13
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
14
Internal Revenue Service. Publication 537 – Installment Sales
15
GovInfo. 26 USC 453 – Installment Method
16
Internal Revenue Service. Publication 526 – Charitable Contributions
17
Internal Revenue Service. Instructions for Schedule D (Form 1040)