The depreciation recapture tax rate depends on what you sold. Gain attributable to depreciation on business equipment, vehicles, and other personal property is taxed at your ordinary income rate, which runs as high as 37%. Gain attributable to depreciation on real property, like a rental building, is taxed at a maximum rate of 25%. Both sit above the 0%, 15%, or 20% long-term capital gains rates that apply to the rest of your profit, and a 3.8% surtax and state income tax can push the combined bite higher still.
Equipment and Other Personal Property: Ordinary Rates up to 37%
Section 1245 governs the sale of tangible personal property used in a business: equipment, machinery, vehicles, and similar assets. When you sell at a gain, every dollar of depreciation you previously claimed comes back as ordinary income, up to the amount of your gain. There is no preferential rate. The recaptured amount stacks on top of your other income and is taxed at whatever bracket that produces.
For 2026, ordinary rates range from 10% to 37%. Single filers reach the 37% bracket above $640,600 of taxable income; married couples filing jointly reach it above $768,700.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large gain on a fully depreciated asset can push a chunk of that income into the top bracket.
The statute leaves little room to work around this. Section 1245 provides that the recapture “shall be recognized notwithstanding any other provision” of the tax code.2Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property You deducted the depreciation against ordinary income while you owned the asset, and you pay ordinary rates on that same amount when you sell.
Real Property: 25% Maximum Rate
Real property gets more favorable treatment. Section 1250 technically only recaptures depreciation that exceeded the straight-line method,3Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty and virtually all residential and commercial rental property placed in service after 1986 uses straight-line, so there is usually no “additional depreciation” to recapture under the traditional rule.
To fill that gap, the code created a category called unrecaptured Section 1250 gain. It captures the straight-line depreciation you took and taxes it at a maximum rate of 25% under Section 1(h).4Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The 25% figure is a ceiling, not a floor. If your ordinary bracket is below 25%, you pay at the lower rate. Most investors selling appreciated rental property have enough income to trigger the full 25%.
How Much of Your Gain Is Taxed at the Recapture Rate
The rate only applies to a specific slice of the gain. For both Section 1245 and Section 1250 property, the recaptured amount equals the lesser of the total depreciation you claimed or the total gain on the sale.
A Section 1245 example: you bought factory equipment for $100,000, claimed $60,000 in depreciation, and have an adjusted basis of $40,000. Sell it for $85,000 and your gain is $45,000. The recaptured amount is the lesser of $60,000 or $45,000, so the full $45,000 is ordinary income. Sell the same equipment for $110,000 and the gain is $70,000; the first $60,000 is ordinary income under Section 1245, and the remaining $10,000 is a Section 1231 gain generally eligible for long-term capital gains rates.2Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
A real property example: you sell an apartment building for a $500,000 total gain and had taken $200,000 in straight-line depreciation. That $200,000 is unrecaptured Section 1250 gain, taxed at up to 25%. The remaining $300,000 is taxed at long-term capital gains rates.
Sales are reported on Form 4797, which separates recapture income from other gain and requires you to allocate the sale price between depreciable property and non-depreciable property such as land based on fair market value.5Internal Revenue Service. Instructions for Form 4797 (2025)
The Rate on the Rest of Your Gain
Anything beyond the recapture portion is taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, single filers pay 0% up to $49,450 of taxable income and 15% up to $545,500, with 20% applying above that. Married couples filing jointly reach 15% at $98,900 and 20% at $613,700. Most sellers of investment property land in the 15% bracket on this non-recapture portion.
Add 3.8% for the Net Investment Income Tax
Higher earners face an additional 3.8% Net Investment Income Tax on the lesser of their net investment income or the amount by which their modified adjusted gross income exceeds the threshold. The thresholds are $250,000 for joint filers, $200,000 for singles, and $125,000 for married filing separately.7Internal Revenue Service. Net Investment Income Tax These figures are not adjusted for inflation and have not changed since the tax took effect in 2013.
For rental property, the NIIT generally applies to the entire gain, including both the 25% recapture portion and any remaining long-term capital gain. Rental activity is almost always treated as passive regardless of your involvement, so a sizable rental sale can push the effective federal rate on the depreciation portion to 28.8%.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax For business property where you actively participate in operations, the gain may be excluded from net investment income.
State Income Tax on Top
Federal rates are only part of the number. Most states tax capital gains and recaptured depreciation as ordinary income, adding roughly 3% to over 13% depending on where you live. A handful of states impose no income tax on these gains at all. Most states do not distinguish recapture from regular capital gains, so the state rate applies uniformly to the whole gain.
Combining the federal recapture rate, the potential 3.8% NIIT, and state tax, the effective rate on recaptured depreciation can approach 50% in high-tax states. Running the combined calculation before you list is the only way to know what you will actually keep.
Situations Where the Rate Does Not Work the Way You Expect
Home Office Depreciation
The Section 121 exclusion shields up to $250,000 of gain on a primary home ($500,000 for married couples), but it does not cover gain equal to depreciation claimed after May 6, 1997.9Internal Revenue Service. Sales, Trades, Exchanges 3 If you deducted $15,000 in home office depreciation, that $15,000 is unrecaptured Section 1250 gain taxed at up to 25% when you sell, no matter how much total gain the home sale exclusion otherwise shields.
Installment Sales
Spreading payments over multiple years does not spread the recapture tax. Section 453(i) requires all depreciation recapture income to be recognized in the year of sale, even if you have not received a payment yet.10Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method Only the gain beyond the recapture amount gets installment treatment. Form 6252 has a specific line for recapture that is “fully taxable in the year of sale even if no payments were received.”11Internal Revenue Service. Form 6252 Installment Sale Income
1031 Exchanges
A like-kind exchange under Section 1031 defers the entire gain, including recapture, when you swap one investment property for another. The liability does not disappear; it transfers to the replacement property through a reduced basis and surfaces when you eventually sell without exchanging again.12Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 Since 2018, Section 1031 applies only to real property, so Section 1245 recapture on business equipment cannot be deferred this way.13Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Receiving any non-like-kind property, known as boot, triggers immediate recognition, and the IRS allocates boot first to depreciation recapture.
Holding Until Death
One scenario eliminates recapture entirely. Under Section 1014, property inherited from a decedent gets a stepped-up basis equal to its fair market value at the date of death.14Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent All the accumulated depreciation that would have been recaptured in a lifetime sale effectively vanishes. If you bought a rental for $400,000, claimed $150,000 in depreciation, and the property is worth $700,000 at your death, your heirs take a $700,000 basis. A sale the next day at that price produces no gain and no recapture.