Depreciation recapture is the tax on depreciation you claimed, or could have claimed, when you sell income property at a gain. Straight-line depreciation on a building is taxed as unrecaptured Section 1250 gain at a maximum 25% federal rate, according to IRS Topic 409. Depreciation on Section 1245 property, including personal property reclassified through a cost segregation study, is recaptured as ordinary income at rates up to 37%.
The rule applies even if you never claimed the deductions. Recapture is also limited to your gain on each asset sold. Below: how depreciation recapture works, the rates that apply, how to calculate it on a rental property, and how to defer or reduce it.
Timing makes this more pressing. The One Big Beautiful Bill Act (OBBBA) made 100% bonus depreciation permanent for property acquired after January 19, 2025. Bigger deductions today mean more potential recapture at sale.
Key takeaways
- Straight-line depreciation on a building is taxed at a maximum 25% federal rate when you sell.
- Section 1245 recapture, including cost segregation assets and Section 179 expensing, is ordinary income taxed at up to 37%.
- Recapture can't exceed your gain on each asset, so an asset sold below its adjusted basis produces no recapture. Because gain is allocated by fair market value, a fully depreciated asset can still produce recapture even when the property as a whole sells at a loss.
- The IRS reduces your basis by depreciation "allowed or allowable," even if you never claimed it.
- In an installment sale, all ordinary recapture is taxed in the year of sale, not as payments arrive.
- A 1031 exchange defers recapture, and holding until death eliminates it through the basis step-up.
- Cost segregation raises the ordinary-income share of future gain in exchange for larger deductions now.
What Is Depreciation Recapture?
Depreciation recapture is the IRS rule that taxes depreciation deductions when you sell a property for more than its adjusted basis. Depreciation lowers your basis each year, so it raises your gain at sale. Recapture determines how much of that gain is taxed at higher rates than ordinary long-term capital gains.
For real estate, standard building depreciation is generally treated as unrecaptured Section 1250 gain and taxed at a maximum 25% federal rate. Depreciation on Section 1245 property, from cost segregation, bonus depreciation or Section 179, is generally taxed at ordinary income rates.
Do You Pay Recapture If You Never Claimed Depreciation?
Yes. The IRS applies an "allowed or allowable" rule. Your basis is reduced by the greater of the depreciation you claimed or the depreciation you could have claimed. If you owned a rental for 10 years and never took depreciation, the IRS still calculates your gain as if you had.
A $1 million commercial building, depreciated over 39 years, generates about $256,000 of allowable depreciation in 10 years. Skip those deductions and you can still owe up to $64,000 of federal tax on that amount at sale. You get no deductions during ownership and the same tax at exit.
The fix is to claim the missed depreciation before you sell. If you've filed two or more returns without it, a change in accounting method (Form 3115) lets you catch up. The Section 481(a) adjustment goes on a current return, without amending prior years. If you've filed only one return, you generally amend it instead. R.E. Cost Seg regularly finds missed depreciation during property analyses.
Depreciation Recapture Tax Rate
The depreciation recapture tax rate depends on the type of property the depreciation came from. Most rental property sellers face a 25% maximum rate on building depreciation. Personal property and other §1245 assets are taxed at ordinary income rates up to 37%.
| Portion of the gain | How it's taxed (federal, 2026) |
|---|---|
| §1245 recapture (personal property, equipment, §179 expensing) | Ordinary income, up to 37% |
| §1250 "additional depreciation" (depreciation above straight-line, such as bonus on land improvements) | Ordinary income, up to 37% |
| Unrecaptured §1250 gain (straight-line building depreciation) | Ordinary rates, capped at 25% |
| Gain above original cost (appreciation) | Long-term capital gains: 0%, 15% or 20% |
| Net investment income tax, if it applies | Additional 3.8% |
| State income tax | Varies; many states tax all gain as ordinary income |
Recapture is calculated before the remaining gain is taxed at capital gains rates. The amount recaptured on each asset can't exceed your gain on that asset. For more on how the pieces interact, see capital gains vs. depreciation.
Section 1245 vs. Section 1250 Property
Section 1245 property is generally personal property, and its depreciation is recaptured as ordinary income. Section 1250 property is generally real property, such as buildings, structural components and land improvements. Its straight-line depreciation is taxed at up to 25%.
| Section 1245 property | Section 1250 property | |
|---|---|---|
| What it includes | Personal property and equipment: appliances, carpet, cabinetry, dedicated electrical, furniture, fixtures | Buildings, structural components, land improvements (parking lots, landscaping, sidewalks), qualified improvement property (QIP) |
| Typical recovery period in a cost seg study | 5 or 7 years | 15 years (land improvements, QIP); 27.5 or 39 years (building) |
| How depreciation is recaptured | Ordinary income, to the extent of the lesser of gain or depreciation taken | Straight-line portion: unrecaptured §1250 gain, capped at 25%. Depreciation above straight-line, such as bonus: ordinary income |
| Top federal rate | 37% | 25% (37% on any additional depreciation) |
Are land improvements 1245 or 1250 property? Land improvements are generally Section 1250 property, even though they have a 15-year life and qualify for bonus depreciation. If you take bonus depreciation on them, or use their default 150% declining balance method, the amount above straight-line is "additional depreciation." It can be recaptured as ordinary income, up to your gain on those assets.
Is 15-year property 1245 or 1250? For real estate, 15-year property is usually land improvements or qualified improvement property, which are §1250. The 5- and 7-year assets identified in a cost segregation study are §1245. Leasehold improvements depend on what was built; see our guide to leasehold improvements.
The trade-off, stated plainly: cost segregation changes the character of the gain, not just the timing. Moving basis from the building into §1245 property converts some future 25% gain into ordinary income. The study often still comes out ahead, depending on your rates and exit, because:
- The deductions arrive now, often at the same or a higher rate than the recapture later.
- Any portion of the reclassified assets that has lost value by the sale is never recaptured.
- Exits such as a 1031 exchange, holding until death, and partial asset dispositions can defer or reduce the recapture.
Unrecaptured Section 1250 Gain
Unrecaptured Section 1250 gain is the part of your gain on real property that comes from straight-line depreciation. It is taxed at your ordinary rate, but never more than 25% federally. For most rental property sellers, it is the largest piece of "depreciation recapture."
Section 1250 recapture vs. unrecaptured Section 1250 gain. They sound alike but are different:
- §1250 recapture ("recapture proper") taxes depreciation above straight-line as ordinary income. Buildings placed in service after 1986 use straight-line MACRS, so this is usually zero for the building itself. It can apply to bonus depreciation taken on land improvements or QIP.
- Unrecaptured §1250 gain is the straight-line depreciation that isn't recaptured as ordinary income. It stays a capital gain but is taxed at up to 25% instead of 0/15/20%.
It is limited to the lesser of the straight-line depreciation taken or your gain on the property. It also can't exceed your net §1231 gain for the year, according to IRS Publication 544.
Can long-term capital losses offset unrecaptured Section 1250 gain? Generally, yes. Unrecaptured §1250 gain is part of net capital gain, so capital losses go into the netting before the 25% rate applies. The Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions handles the ordering. §1245 recapture is different. It is ordinary income, and capital losses offset ordinary income only up to $3,000 a year.
Depreciation Recapture on the Sale of Rental Property
When you sell a rental property at a gain, the depreciation you took, or could have taken, is taxed first. Straight-line depreciation on the building is taxed at up to 25%. Any §1245 depreciation from a cost segregation study is taxed at ordinary rates. The remaining gain above your original cost is taxed at long-term capital gains rates.
The calculation in four steps:
- Adjusted basis = purchase price + improvements − depreciation allowed or allowable
- Total gain = sale price − selling costs − adjusted basis
- Split the gain by character: §1245 recapture (ordinary), any §1250 additional depreciation (ordinary), unrecaptured §1250 gain (up to 25%), and the rest (capital gains)
- Apply the rates, then add NIIT and state tax if they apply
How to Calculate Depreciation Recapture
To estimate depreciation recapture on a straight-line rental, multiply accumulated depreciation by up to 25%:
Accumulated depreciation × up to 25% = estimated federal tax on unrecaptured §1250 gain
Example 1: Straight-line rental property
- Purchase price: $500,000 ($100,000 land, $400,000 building)
- Accumulated straight-line depreciation after about 10 years: $150,000
- Adjusted basis: $350,000
- Sale price, net of selling costs: $700,000, so total gain is $350,000
- Unrecaptured §1250 gain: $150,000 × 25% = $37,500 at most
- Remaining capital gain: $200,000, taxed at 0%, 15% or 20%
Example 2: A hypothetical apartment sale
Assume a Phoenix investor bought apartments for $5 million in 2014, with about $4 million allocated to the buildings. Ten years of straight-line depreciation produced $1.45 million of deductions, reducing his adjusted basis to $3.55 million. He budgeted for tax on his $2 million of appreciation. His 2024 sale at $7 million produced a total gain of $3.45 million:
- Unrecaptured Section 1250 gain: $1.45 million × 25% = $362,500
- Remaining capital gain: $2 million × 20% = $400,000
- Arizona state tax: $2,587,500 × 2.5% = $64,688
- Total tax bill: $827,188
Arizona taxes the full $3.45 million gain at its 2.5% flat rate. It also allows a 25% subtraction for long-term capital gains on assets acquired after December 31, 2011, per the Arizona Form 140 instructions. That $862,500 subtraction leaves $2,587,500 subject to state tax. The federal figures exclude the 3.8% net investment income tax, which would apply for most investors at this income level.
His error was assuming recapture came out of his $2 million of appreciation. It doesn't. Depreciation reduces basis, so the $1.45 million and the $2 million are taxed separately. Recapture accounted for 44% of his total tax.
Example 3: The same rental, with and without a cost segregation study
Assumptions: a $1.2 million residential rental ($200,000 land, $1 million building) acquired after January 19, 2025, and sold five years later for $1.5 million. The study reclassifies $200,000 to 5- and 7-year personal property and $50,000 to 15-year land improvements, with 100% bonus depreciation on both. At sale, $80,000 of the price is allocated to the personal property and $40,000 to the land improvements. The seller is in the 37% bracket. NIIT and state tax are excluded, and the mid-month convention is ignored.
| Straight-line only | With cost segregation | |
|---|---|---|
| Depreciation taken over 5 years | $181,818 | $386,364 |
| Adjusted basis at sale | $1,018,182 | $813,636 |
| Total gain | $481,818 | $686,364 |
| §1245 recapture at 37% | $0 | $80,000 → $29,600 |
| §1250 additional depreciation at 37% | $0 | $33,333 → $12,333 |
| Unrecaptured §1250 gain at 25% | $181,818 → $45,455 | $143,031 → $35,758 |
| Capital gain at 20% | $300,000 → $60,000 | $430,000 → $86,000 |
| Federal tax at sale | $105,455 | $163,691 |
The study adds $58,236 of tax at exit. It also produced $204,546 more in deductions during ownership, worth about $75,682 at 37%, most of it in year one. The net is about $17,446 in the investor's favor, before counting five years of time value on the early savings. Note that $120,000 of the personal property depreciation is never recaptured, because those assets were worth less at sale than when placed in service.
This math assumes the investor can use the deductions when they arise. Under the passive activity loss rules, rental losses can be suspended. Exceptions include having passive income, real estate professional status, or material participation in a short-term rental. Suspended losses delay the benefit. Holding period changes the result too; see the five-year rule.
To estimate your own exposure, use this depreciation recapture worksheet:
- §1245 depreciation taken (limited to the gain allocated to those assets) × your ordinary rate: $____
- Any §1250 additional depreciation × your ordinary rate: $____
- Remaining straight-line building depreciation × up to 25%: $____
- State tax on the recapture: $____
- Total estimated recapture tax: $____
How Does Cost Segregation Affect Recapture?
Cost segregation increases the share of your future gain that is recaptured as ordinary income, in exchange for much larger deductions now. Whether it pays off depends on your tax rate today and at sale, passive loss limits, how long you hold, and how you exit.
A study front-loads deductions by moving building components into 5-, 7- and 15-year property. 100% bonus depreciation is permanent for qualified property acquired after January 19, 2025, according to IRS Notice 2026-11. Those components can be deducted in year one. The proportion reclassified depends on the property type and its components, which is why we price and model each property individually.
On a taxable sale, the §1245 portion is recaptured at ordinary rates, to the extent of the gain allocated to those assets. Compare outcomes on a like-for-like basis, as in Example 3, rather than comparing recapture alone. For the full comparison, see cost segregation vs. standard depreciation and what goes down must come up.
Site visits by qualified engineers identify more reclassification opportunities. That increases both current benefits and future recapture exposure. Understanding the trade-off before the study helps avoid surprises at sale.
Depreciation Recapture and 1031 Exchanges
A properly structured 1031 exchange defers depreciation recapture; it doesn't eliminate it. Since 2018, §1031 applies only to real property, so the details of your cost segregation study matter when you exchange.
- Straight-line building depreciation carries over into the replacement property's basis and isn't taxed in a full deferral exchange.
- §1245 property in the relinquished property can trigger ordinary income recapture in two cases. The first is when it isn't real property for §1031 purposes. The second is when the replacement doesn't include enough §1245 property, under §1245(b)(4). Some components a study identifies may still count as real property under the §1031 regulations, so analyze this before closing.
- Boot, meaning cash or debt relief you don't replace, is taxable. Recapture is generally recognized first out of that gain.
- Exchanging into raw land can trigger §1245 recapture on the reclassified components, because land contains no §1245 property. Additional depreciation on §1250 components, such as land improvements or QIP that took bonus depreciation, can also be taxed as ordinary income under §1250(d)(4), because bare land isn't depreciable §1250 property. Straight-line building depreciation still carries over rather than being recaptured.
Other things that can break deferral: related-party exchanges that don't meet the two-year holding rule, and exchanges between U.S. and foreign real property, which aren't like-kind.
Example: An office owner reclassifies $1.2 million to §1245 property and takes 100% bonus depreciation. Three years later, she exchanges into development land. If the reclassified components aren't real property for §1031 purposes, up to $1.2 million can be taxed as ordinary income. At 37%, that is up to $444,000, even though the rest of the gain is deferred.
For how bonus depreciation interacts with an exchange, see our guide to 1031 depreciation recapture. R.E. Cost Seg can analyze replacement properties before closing to estimate recapture exposure.
Other Recapture Rules
Three other rules can turn gain on real estate into ordinary income: Section 179 recapture, the Section 1231 lookback, and Section 751 for partnership interests.
Section 179 Recapture
Amounts expensed under Section 179 are treated as §1245 depreciation. They are recaptured as ordinary income when you sell at a gain, even if the property is QIP. Section 179 also has its own trigger. If business use drops to 50% or less during the recovery period, you recapture part of the deduction that year. The amount is the §179 deduction minus the depreciation you would otherwise have taken. Vehicles are the common example.
QIP has a 15-year recovery period (since the CARES Act). It is eligible for 100% bonus depreciation if acquired after January 19, 2025. It remains §1250 property, so straight-line depreciation keeps the 25% cap. Bonus above straight-line can be recaptured as ordinary income.
Energy-efficient commercial building deduction (§179D): for property placed in service in 2025, the deduction runs up to $5.81 per square foot. That requires meeting prevailing wage and apprenticeship rules. Without them, the maximum is $1.16. Amounts are adjusted for inflation each year. The deduction reduces basis and is recaptured as ordinary income. OBBBA ends §179D for property whose construction begins after June 30, 2026.
Section 1231 Lookback
Net §1231 gains, generally gains on business and rental property held more than a year, are normally taxed as long-term capital gains. The lookback is the exception. Unrecaptured net §1231 losses from the previous five years count against you. An equal amount of this year's net §1231 gain is taxed as ordinary income. A loss sale in 2023 can make part of a 2026 gain ordinary.
Section 751 (Partnership Interests)
Selling an interest in a partnership or multi-member LLC that holds depreciated property triggers its own split. The part of your gain from §1245 recapture is taxed as ordinary income under §751. The part from unrecaptured §1250 gain is taxed at up to 25%. Work with your CPA on the allocation.
How Do State Taxes Affect Depreciation Recapture?
Many states tax all gain, including recapture, as ordinary income, and several don't follow federal bonus depreciation. That creates a second recapture calculation with different numbers.
California is the most complex case. It hasn't conformed to federal bonus depreciation, including OBBBA's permanent 100% bonus, and it taxes capital gains as ordinary income. You'll keep two depreciation schedules and face different recapture amounts. California taxes the gain at rates up to 13.3%, on top of the federal 25% or ordinary rate.
New York and Illinois are among the other states that decouple from federal bonus depreciation. See our guide to state conformity for others. Top state rates to plan around:
- California: 13.3%
- New York: 10.9% for high-income taxpayers
- New Jersey: 10.75%
- Hawaii: 11% on ordinary income, including §1245 recapture. Long-term capital gains, including unrecaptured §1250 gain, are capped at 7.25% (Hawaii Tax Review Commission).
Moving before the sale doesn't avoid it. Sell California property after relocating to Texas and California still taxes the gain, because it is sourced to the property's location.
Does My Business Structure Affect Depreciation Recapture?
Entity structure determines who pays the recapture tax and at what rates.
- Pass-through entities (LLCs, partnerships, S corporations) pass recapture through to owners at personal rates. A $300,000 §1245 recapture event costs up to $111,000 at 37%.
- C corporations pay 21% on the gain, $63,000 on the same $300,000. Distributing the remaining $237,000 as a dividend adds about $47,400 at 20%, before NIIT. That totals roughly $110,400. Corporations also face extra ordinary recapture on real property under §291.
How to Avoid (or Reduce) Depreciation Recapture
On a taxable sale, depreciation recapture can't be avoided outright, but it can be deferred, spread out, offset, or eliminated at death. The main options are a 1031 exchange, holding until death, an installment sale, suspended passive losses, a charitable remainder trust, and partial asset dispositions.
1031 Exchange
Defers recapture as long as you keep exchanging and replace enough value and debt. See the 1031 section above.
Holding Until Death
Heirs receive a stepped-up basis equal to fair market value, so the accumulated depreciation is never recaptured. They can even commission a new cost segregation study and restart depreciation. Lifetime gifts are different. The recipient takes your basis and inherits your recapture exposure. A sale to a family member is taxed like any other sale, and some related-party sales can make the whole gain ordinary income.
Installment Sales
An installment sale can spread the capital gain portion over several years. But under §453(i), all §1245 and §1250 ordinary recapture is recognized in the year of sale, even if you receive little cash that year. Unrecaptured §1250 gain is taxed as payments arrive, and it comes out of each payment first (Treas. Reg. §1.453-12). Interest charges can apply to large installment obligations.
Suspended Passive Losses
A full taxable sale of your entire interest in a passive activity, to an unrelated buyer, releases its suspended losses under §469(g). Those losses can offset the gain, including recapture, and your other income. You don't need real estate professional status for this.
Partial Asset Dispositions
A partial asset disposition election applies when you replace a roof, HVAC system or other building component. It lets you write off the old component's remaining basis. That component is gone from your basis, so it isn't part of future recapture.
Charitable Remainder Trusts
Transferring property to a charitable remainder trust before a sale lets the trust sell without immediate tax. You receive an income stream, and the recapture is taxed to you over time as distributions are made, rather than all at once.
Opportunity Zones
§1245 recapture is ordinary income and can't be deferred by investing in a Qualified Opportunity Fund. Capital gain from the sale may qualify. Under the original program, deferred gain is taxed on December 31, 2026. For investments made on or after January 1, 2027, OBBBA sets a rolling five-year deferral (IRS Internal Revenue Bulletin 2026-28).
Delaware Statutory Trusts
DSTs can serve as 1031 replacement property for investors who want passive ownership. Before you commit, check the replacement value and debt, and how your relinquished property's §1245 components will be treated.
Timing
Closing on January 2 instead of December 31 moves the recapture into the next tax year and gives you twelve months to plan. In the recapture year, charitable contributions and other deductions can offset the ordinary income.
Depreciation Recapture Myths, Corrected
Most costly recapture mistakes trace back to five common myths.
Myth: "1031 exchanges eliminate recapture permanently."
Reality: Exchanges defer recapture. It carries over to the replacement property and is taxed on an eventual taxable sale, unless you hold until death.
Myth: "Recapture applies even if you sell at a loss."
Reality: Recapture is limited to your gain on each asset. If you sell an asset for less than its adjusted basis, there's no recapture on it.
Myth: "All real estate recapture is capped at 25%."
Reality: Only unrecaptured §1250 gain is capped at 25%. §1245 property from cost segregation, §179 expensing and §1250 additional depreciation are taxed at ordinary rates up to 37%.
Myth: "Holding property for 30 years eliminates recapture."
Reality: Recapture never expires. Only death, through the basis step-up, eliminates it.
Myth: "Form 3115 eliminates past recapture."
Reality: A change in accounting method lets you claim missed depreciation. The allowed-or-allowable rule means the exposure was already there.
What to Watch in 2026
Five rules will shape recapture planning through the end of 2026 and into 2027.
- Bonus depreciation by acquisition date. Property acquired after January 19, 2025, gets permanent 100% bonus. Property acquired on or before that date follows the TCJA phase-down by placed-in-service year: 80% (2023), 60% (2024), 40% (2025), 20% (2026) and 0% after that. Long-production-period property gets one extra year at each rate. Keep acquisition and placed-in-service dates documented.
- State conformity. Many states still don't follow federal bonus depreciation, so state recapture will differ from federal.
- §179D. Ends for property whose construction begins after June 30, 2026.
- Opportunity Zones. The original deferral period ends December 31, 2026.
- Step-up in basis. Proposals to limit it come up regularly; it is current law today.
Frequently Asked Questions
Is depreciation recapture taxed as ordinary income?
Partly. §1245 recapture and any §1250 additional depreciation are taxed as ordinary income, up to 37%. Straight-line depreciation on buildings is taxed as unrecaptured §1250 gain, at ordinary rates capped at 25%.
How much is depreciation recapture tax?
For a straight-line rental, multiply accumulated depreciation by up to 25%. $150,000 of depreciation creates up to $37,500 of federal tax. Add ordinary rates on any §1245 depreciation, plus NIIT and state tax where they apply.
What is unrecaptured Section 1250 gain?
It is the part of your gain on real property that comes from straight-line depreciation. It is taxed at a maximum 25% federal rate, and it is limited to your gain on the sale.
Is there depreciation recapture on 1250 property?
Yes, but usually not as ordinary income. For post-1986 buildings, straight-line depreciation is taxed as unrecaptured §1250 gain at up to 25%. Ordinary §1250 recapture applies only to depreciation above straight-line, such as bonus taken on land improvements.
Is 1245 recapture included in net capital gain?
No. §1245 recapture is ordinary income, so it isn't part of net capital gain and doesn't get capital gains rates. Unrecaptured §1250 gain, by contrast, is part of net capital gain.
Can long-term capital losses offset Section 1250 recapture?
Capital losses can reduce unrecaptured §1250 gain, because it is part of net capital gain. They can offset ordinary §1245 recapture only up to the $3,000 annual limit against ordinary income.
Do you pay depreciation recapture if you never claimed depreciation?
Yes. The IRS uses depreciation "allowed or allowable," so your gain is calculated as if you had taken it. A change in accounting method can let you claim the missed deductions before you sell.
Is there depreciation recapture if you sell at a loss?
Not on an asset sold at a loss. Recapture is limited to the gain on each asset, so an asset sold below its adjusted basis produces no recapture. A fully depreciated asset can still produce recapture even when the property as a whole sells at a loss.
The Bottom Line on Depreciation Recapture
Depreciation recapture is the cost of the deductions you took. Straight-line building depreciation is capped at 25%, while §1245 property and additional depreciation are taxed at ordinary rates up to 37%. A 1031 exchange can defer it, holding until death eliminates it, and cost segregation trades a larger ordinary portion for bigger deductions today.
R.E. Cost Seg models recapture exposure alongside every cost segregation study, so you see both the year-one savings and the exit tax before you decide. Get your free proposal.
Confirm how these rules apply to your sale with your tax advisor before you act.
