At a glance
- What it is. The part of your gain on the sale of rental property that came from depreciation you deducted, or were allowed to deduct, while you owned it.
- What it is called. For a residential rental building it is unrecaptured section 1250 gain, reported on Schedule D, line 19.
- How it is taxed. At a maximum of 25 percent. Not a flat 25 percent, and not the 15 percent most sellers assume.
- What people miss. The 3.8 percent net investment income tax applies on top, and its thresholds have never been adjusted for inflation.
Depreciation recapture on the sale of rental property is the reason the tax bill at closing is larger than the arithmetic most owners do in their heads. Every year you owned the property you deducted depreciation. Every dollar of that deduction reduced your basis, and a lower basis means a larger gain when you sell. The portion of that gain attributable to depreciation is called unrecaptured section 1250 gain, and it is taxed at a maximum of 25 percent rather than at the long-term capital gain rate.
The number most sellers have in mind is 15 percent applied to sale price less what they paid. The number on the return is a blend of three rates applied to a larger gain. On the sale below, the difference is $48,168.
The two recapture rules, and which one applies to a rental
Recapture is not one rule. Which one applies depends on what was depreciated, and the distinction matters most to owners who have had a cost segregation study done.
| Property | Rule | How the recaptured amount is taxed |
|---|---|---|
| The building itself, and structural components | Section 1250 | Unrecaptured section 1250 gain, at a maximum of 25 percent |
| Appliances, carpet, cabinetry, land improvements, and anything reclassified by a cost segregation study | Section 1245 | Ordinary income, at your marginal rate, to the extent of depreciation claimed (Publication 544) |
| Land | Neither | Land is not depreciable, so there is nothing to recapture |
Why this matters after a cost segregation study. Accelerating deductions into the early years is valuable, but the components that were accelerated come back as ordinary income under section 1245, not at the 25 percent ceiling. The study is still usually worth doing. It is not free, and the exit is where the cost shows up.
What this looks like on an actual return
If you read nothing else, read this. One property, one sale, two ways of counting.
A married couple filing jointly sell a residential rental for $900,000 after eleven full years of ownership. They paid $600,000, spent $54,000 on selling costs, and have $150,000 of wages in the year of sale, and take the $32,200 standard deduction.
| On the return | What sellers expect | What the return says |
|---|---|---|
| Sale price | $900,000 | $900,000 |
| Selling costs | ($54,000) | ($54,000) |
| Original purchase price | ($600,000) | ($600,000) |
| Depreciation taken over eleven years | Not counted | ($180,000) |
| Adjusted basis | $600,000 | $420,000 |
| Total gain | $246,000 | $426,000 |
| Taxed as unrecaptured section 1250 gain, at ordinary rates up to 25 percent | $0 | $180,000 |
| Taxed as long-term capital gain, at 15 percent | $246,000 | $246,000 |
| Federal tax on the gain | $36,900 | $78,228 |
| Net investment income tax, at 3.8 percent | $5,548 | $12,388 |
| Total federal tax on the sale | $42,448 | $90,616 |
$48,168 more federal tax on identical facts, more than double, and none of it comes from a rate change or a rule anyone altered. It comes from eleven years of deductions the seller had already spent and stopped thinking about. For this couple the recaptured $180,000 falls in the 22 and 24 percent brackets, so it is taxed below the 25 percent ceiling. At higher incomes the full 25 percent applies. State tax is on top of all of it.
The one-line version. Depreciation is not forgiven at sale, it is deferred, and it comes back at a higher rate than the rest of your gain. Figures are illustrative and rounded.
Why the bill is larger than the 25 percent headline
Two additions catch people who have read only the headline rate.
The net investment income tax. Gain on the sale of rental real estate is net investment income, so a 3.8 percent surtax applies once modified adjusted gross income passes $200,000 for a single filer, $250,000 filing jointly, or $125,000 married filing separately. It applies to the smaller of the net investment income or the amount by which modified adjusted gross income exceeds the threshold, which is why it reaches only part of the gain in the example above. Those figures come from section 1411(b), and the section contains no inflation adjustment. Every other threshold in this article moves each year. These have not moved since the tax took effect, so each year a larger share of ordinary sellers crosses them. A one-time gain of several hundred thousand dollars puts almost anyone over the line in the year of sale.
The bracket the gain itself creates. For 2026 the 15 percent rate runs up to $545,500 of taxable income for a single filer and $613,700 filing jointly, above which the rate is 20 percent, per Rev. Proc. 2025-32, section 4.03. A large gain is included in taxable income, so a sale can push its own later dollars into the 20 percent band even though the seller’s salary never changed.
The allowed or allowable trap
Basis is reduced by the depreciation you took, or the depreciation you were entitled to take and did not. That is the language of section 1016(a)(2): adjustments are made for exhaustion and wear and tear “to the extent of the amount allowed as deductions in computing taxable income under this subtitle… but not less than the amount allowable.”
An owner who never claimed depreciation therefore pays recapture anyway, on deductions they never received. It is the worst outcome available: the deduction was lost and the tax on it is still due. Where depreciation was understated or omitted, the correction is normally Form 3115 with a section 481(a) adjustment, which can recover the missed deductions in the year of change rather than through amended returns. That is a conversation to have before the property is listed, not after it closes.
A worked example, from the depreciation schedule up
The $180,000 in the table above is not a round number chosen for convenience. It comes off a schedule, and the schedule starts with an allocation between land and building.
| Component | Allocated cost | Recovery period | Annual depreciation | Taken over eleven years |
|---|---|---|---|---|
| Land | $150,000 | Not depreciable | $0 | $0 |
| Building | $450,000 | 27.5 years | $16,364 | $180,000 |
| Total | $600,000 | $16,364 | $180,000 |
Land is always its own line item. It is not depreciable, it generates no recapture, and an allocation that quietly folds it into the building overstates deductions during ownership and creates a recapture figure at sale that cannot be supported. Where the allocation was never documented, the county assessor’s split between land and improvements is the usual starting point, and Publication 946 sets out the recovery periods and conventions. The first and last years are partial under the mid-month convention, so a real schedule is slightly less tidy than this one.
What to do about it
Recapture cannot be argued away. It can be deferred, spread, offset or, in one case, eliminated. But each route has to be in place before the sale, not after.
A 1031 exchange defers it. Exchanging into like-kind property carries the deferred gain, including the recapture component, into the replacement property’s basis. Nothing is forgiven; the bill moves. Taking cash out of the exchange, or buying a replacement worth less than what you sold, makes part of the gain taxable straight away. Section 1245 components can also generate recapture inside an otherwise clean exchange. The timing rules are strict and unforgiving. Our guide to 1031 exchanges covers the deadlines.
An installment sale spreads it, but not the recapture. Section 453 lets you report capital gain as payments are received, which can keep you under the net investment income tax threshold in some years. Section 1245 recapture is not eligible: it is reported in full in the year of sale, whatever you actually collect that year. Sellers who plan an installment sale around a cost segregation study are frequently surprised by this.
Time the sale into a year that can absorb it. A sale in a year of low ordinary income, a large charitable contribution, or suspended passive losses released on disposition is worth materially more than the same sale twelve months earlier. Passive losses that have been accumulating unused against this property are freed in the year of a fully taxable disposition and can offset the gain directly.
Converting to a primary residence does not clear it. The section 121 exclusion does not shelter depreciation taken after May 6, 1997, and periods of non-qualified use limit the exclusion further. Moving into a former rental for two years removes part of the capital gain, not the recapture.
Death resets basis. Property held until death takes a stepped-up basis, and the recapture disappears with it. This is a genuine planning outcome rather than a strategy, and it is the reason a sale late in life deserves a different analysis than the same sale at fifty.
Frequently asked questions
How much is depreciation recapture tax on the sale of rental property?
For the building, a maximum of 25 percent on the depreciation you claimed, plus 3.8 percent net investment income tax if your income is above the threshold, plus state tax. Components reclassified by a cost segregation study are recaptured as ordinary income at your marginal rate instead. On the $900,000 sale above, recapture accounts for $41,328 of federal tax before the surtax.
What is unrecaptured section 1250 gain?
It is the portion of your gain equal to the depreciation taken on real property, taxed at a maximum of 25 percent rather than at the ordinary long-term capital gain rate, as Topic 409 puts it. It is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions and entered on Schedule D, line 19.
Is depreciation recapture taxed at a flat 25 percent?
No. Twenty-five percent is a ceiling, not a flat rate. A taxpayer whose other income is low enough can pay less, because the gain is stacked into the regular brackets and the 25 percent applies only where the rate would otherwise be higher. Unrecaptured section 1250 gain is stacked directly on top of ordinary income, below the rest of the capital gain, so the ceiling applies only once ordinary income plus the recaptured amount passes the top of the 24 percent bracket: $403,550 of taxable income on a 2026 joint return. The couple in the example above never reach it.
Do I owe recapture if I never claimed depreciation?
Yes. Basis is reduced by depreciation allowed or allowable, so the tax is due on deductions you were entitled to take whether or not you took them. Where depreciation was missed, Form 3115 with a section 481(a) adjustment is usually the route to recovering it, and it needs to be filed before the sale rather than after.
Can a 1031 exchange avoid depreciation recapture?
It defers it rather than avoiding it. The deferred gain, recapture included, carries into the basis of the replacement property and surfaces on a later taxable sale. Cash taken out of the exchange, or a mortgage that gets smaller, is taxable straight away, and section 1245 components can trigger recapture inside an otherwise fully deferred exchange.
Related reading
- How to calculate depreciation on a rental property. The schedule that produces the recapture figure.
- Cost segregation: when it is worth it, and what it does to the exit.
- 1031 exchanges and the deadlines that govern them.
- Bonus depreciation against section 179. Which deductions come back as ordinary income.
- The short-term rental tax loophole. How losses reach W-2 income while you still own the property.
- Real estate professional status. The test that releases passive losses.
- 721 exchange against 1031. Deferring again, or leaving the exchange cycle.
- When to stop depreciating rental property. The events that end depreciation on a rental.
The firm works with rental owners on the planning that has to happen before a sale: the allocation, the basis you can support, and the structure of the exit. Real estate tax services sets out what that covers.
Schedule a call
A short conversation about your situation, our read on it, and whether it is a mutual fit.
General information, not advice for a particular situation. Figures are illustrative and reflect federal law for tax year 2026. Primary sources: Rev. Proc. 2025-32 sections 4.01, 4.03 and 4.14 (2026 tax rate schedules, capital gain rate thresholds and standard deduction); Internal Revenue Code sections 1(h), 1016(a)(2), 1245, 1250 and 1411; IRS Publication 544; IRS Publication 946; IRS Topic 409; and the Instructions for Schedule D (Form 1040). State tax is not addressed.
