Depreciation Recapture Guide | National Tax Tools

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Short Answer

Depreciation recapture is the tax rule that treats the part of your gain created by depreciation less favorably than ordinary long-term capital gain. The recaptured amount is the smaller of the depreciation allowed or allowable and your gain. On section 1245 property (equipment, machinery, vehicles, furniture, and anything expensed under section 179 or bonus depreciation) it is ordinary income, taxed at 10 to 37 percent. On a rental or commercial building depreciated straight-line, the same amount is unrecaptured section 1250 gain, taxed at your ordinary rate but never more than 25 percent. Gain above the depreciation is section 1231 gain at the 0, 15 or 20 percent rates. Depreciation you were entitled to but never claimed still counts.

Key Takeaways

No gain, no recapture. Recapture is capped at the gain, so a sale at a loss produces none (IRS Publication 544).
Two property classes, two outcomes. Section 1245 recapture is ordinary income. Straight-line real property produces unrecaptured §1250 gain, capped at 25 percent by IRC §1(h)(1)(E).
25 percent is a ceiling, not a flat rate. Unrecaptured §1250 gain that falls in the 10 to 24 percent brackets is taxed at those rates.
Allowed or allowable. Basis is reduced by the depreciation you could have taken even if you did not take it.
Held one year or less. The whole gain is ordinary income; none of it qualifies for capital gain rates.
Deferral exists, forgiveness mostly does not. A 1031 exchange defers recapture on real property; an installment sale does not defer §1245 recapture; property held until death escapes it.

Written by Munib Ur Rehman · Reviewed by Nausheen Shahid (LMN Tax Inc.) · Last Reviewed: October 2026

What is depreciation recapture?

Depreciation lets you deduct the cost of a business or rental asset over its recovery period instead of all at once. Each deduction lowers your adjusted basis. When you sell, your gain is measured against that lower basis, so part of the gain exists only because of the deductions you already took against ordinary income.

Without a recapture rule, an owner could deduct depreciation at a 32 or 35 percent rate during ownership and then pay only 15 or 20 percent on the matching gain at sale. Recapture closes most of that gap. It does not create a separate tax; it changes how part of an ordinary sale gain is classified and therefore which rate applies.

The starting arithmetic is the same for every asset:

Amount realized = sale price minus selling expenses (commissions, closing and transfer costs).
Adjusted basis = cost plus capital improvements minus depreciation allowed or allowable.
Gain = amount realized minus adjusted basis.
Recaptured amount = the smaller of the depreciation or the gain.

What happens to the recaptured amount next depends on whether the property is section 1245 property or section 1250 property, which the next two sections cover.

How is section 1245 property taxed when you sell it?

Section 1245 property is, broadly, depreciable personal property: equipment, machinery, furniture, computers, vehicles, and certain other tangible property. It also includes real property to the extent you expensed it under section 179, such as qualified improvement property you elected to deduct immediately.

When you sell section 1245 property at a gain, the part of the gain equal to the depreciation (including any section 179 deduction and bonus depreciation) is ordinary income. Only gain above the depreciation, which arises only if you sell for more than you originally paid, is section 1231 gain eligible for long-term rates.

IRS Publication 544 gives a simple example. A light-duty truck bought for $10,000 had $6,160 of MACRS depreciation and sold for $7,000. Adjusted basis was $3,840, the gain was $3,160, and because $3,160 is less than $6,160, every dollar of it was ordinary income. Most used equipment sells for less than it cost, so in practice the whole gain on a business asset is usually recapture.

Heavy first-year write-offs make this sharper. An asset fully expensed under section 179 or 100 percent bonus depreciation has a $0 basis, so its entire sale price is gain and all of it, up to the original cost, is ordinary income. Equipment also no longer qualifies for a like-kind exchange: since January 1, 2018, section 1031 covers real property only, so a trade-in is a taxable sale followed by a purchase.

What about a rental property or commercial building?

Buildings and their structural components are section 1250 property. The original section 1250 rule recaptures as ordinary income only additional depreciation, meaning depreciation in excess of what the straight-line method would have allowed. Residential rental property (27.5 years) and nonresidential real property (39 years) placed in service after 1986 are depreciated straight-line under MACRS, so if you held the building more than a year there is normally no additional depreciation and no ordinary recapture.

That does not mean the depreciation escapes. IRC §1(h)(6) defines unrecaptured section 1250 gain as the part of the long-term gain on section 1250 property that would have been ordinary income if all the depreciation had been additional depreciation. In plain terms it is the smaller of the straight-line depreciation or the gain. That slice is taxed at your ordinary rate, capped at 25 percent under §1(h)(1)(E), and only the gain above it gets the 0, 15 or 20 percent rates.

Two details trip people up:

Land is never depreciated. Your cost basis includes land, but your depreciation only came from the building. The calculator therefore asks for total cost and total depreciation separately.
Short holding periods change the class. If you hold section 1250 property one year or less, all of the depreciation is additional depreciation and the entire gain is ordinary income in Form 4797 Part II.

Personal property inside a rental, such as appliances, carpet and furniture, is section 1245 property even though the building is section 1250 property. Cost segregation studies deliberately move components into shorter-lived section 1245 classes, which speeds up deductions and turns the matching gain into ordinary recapture at sale.

Do you owe recapture on depreciation you never claimed?

Yes. Basis is reduced by the depreciation allowed or allowable, whichever is greater. Allowable means the amount you were entitled to deduct. If you rented out a property for eight years and never claimed depreciation, your basis still drops as if you had, and the recapture rules apply to that amount when you sell. Publication 544 adds that where no depreciation was taken at all, the allowable amount is figured using the straight-line method.

This is the worst of both outcomes: no deduction while you owned the property and recapture when you sell it. The fix is to claim the missed depreciation before or in the year of sale. Depending on how many years are involved, that is done on amended returns or, where an impermissible method has been used for two or more years, with Form 3115 for a change in accounting method, which lets you take the cumulative missed amount as a catch-up adjustment. Publication 946 describes both routes. Get professional help with Form 3115; it has strict filing rules.

How is each layer taxed in 2026?

For property held more than one year, the gain is split into layers and stacked on top of your other taxable income in a fixed order set by the Schedule D Tax Worksheet: ordinary income first, unrecaptured section 1250 gain next, then the 0, 15 and 20 percent gain on top. One detail matters for high earners: section 1250 gain counts toward the 15 percent breakpoint only up to the top of the 24 percent bracket. Any of it taxed at the 25 percent rate does not use up 15 percent room (worksheet lines 21 and 28).

Gain layers on a sale of depreciated property held more than 1 year (tax year 2026)
Layer	Typical property	2026 federal rate
§1245 ordinary recapture	Equipment, vehicles, furniture, §179 and bonus assets	Ordinary, 10% to 37%
§1250 additional depreciation	Real property depreciated faster than straight-line	Ordinary, 10% to 37%
Unrecaptured §1250 gain	Straight-line rentals and commercial buildings	Ordinary rate, maximum 25%
Remaining §1231 gain	Gain above the depreciation	0% / 15% / 20%
Net investment income tax	Passive or investment property above the MAGI threshold	+3.8%

For 2026, Revenue Procedure 2025-32 sets the 0 percent rate on long-term gain up to $49,450 of taxable income for single filers, $98,900 for married couples filing jointly and $66,200 for heads of household. The 15 percent rate runs to $545,500 single, $613,700 joint and $579,600 head of household, with 20 percent above that. The 24 percent ordinary bracket ends at $201,775 single and $403,550 joint.

That last figure matters for real estate. The worksheet taxes unrecaptured section 1250 gain that fits under the top of the 24 percent bracket at your ordinary rates, and only the part above it at 25 percent. A couple with $140,000 of other income selling a rental with $116,000 of depreciation pays 22 and 24 percent on that slice, not 25. A single filer with $300,000 of other income pays the full 25 percent.

On top of all of it, the 3.8 percent net investment income tax under IRC §1411 can apply to the whole gain when the property was a passive rental or investment and your modified AGI exceeds $200,000 single or $250,000 married filing jointly. Gain on property used in a non-passive trade or business is generally not net investment income. The Net Investment Income Tax Calculator covers the threshold in more detail.

How do section 1231 netting and the five-year lookback work?

Depreciable property and real property used in a trade or business, including rentals, held more than one year are section 1231 property. After recapture is carved out, you net all of the year's section 1231 gains and losses together. A net gain is treated as long-term capital gain. A net loss is an ordinary loss, which is fully deductible against other income.

That favorable asymmetry has a catch in IRC §1231(c). A net section 1231 gain is treated as ordinary income to the extent of your nonrecaptured net section 1231 losses from the five preceding tax years. If you deducted a $30,000 ordinary 1231 loss in 2023, the first $30,000 of net 1231 gain through 2028 comes back as ordinary income. Form 4797 line 8 carries the amount, and the Unrecaptured Section 1250 Gain Worksheet subtracts it from the 25 percent layer first, before it touches the 0, 15 or 20 percent gain.

The calculator accepts a nonrecaptured loss figure and applies it in that order. If you have several property sales in one year, net them first; the calculator models a single sale.

Worked example: selling an office building in 2026

A single filer with $300,000 of other income sells a small office building held as a passive investment. They paid $500,000 for it, $100,000 of which was land, and took $120,000 of straight-line depreciation on the $400,000 building over about twelve years. The building sells for $720,000 with $40,000 of selling costs. They take the 2026 standard deduction of $16,100.

The gain

Amount realized ($720,000 - $40,000)$680,000

Adjusted basis ($500,000 - $120,000)$380,000

Total gain$300,000

Unrecaptured §1250 gain (lesser of $120,000 or $300,000)$120,000

Remaining long-term gain$180,000

2026 federal tax on the sale

Taxable income ($300,000 + $300,000 - $16,100)$583,900

Ordinary income under the gain (above the $201,775 top of the 24% bracket)$283,900

§1250 gain: $120,000 at 25%$30,000

Long-term gain: $180,000 at 15% (room from $283,900 to $545,500 is $261,600)$27,000

NIIT: 3.8% x $300,000 (MAGI $600,000 exceeds $200,000 by more than the gain)$11,400

Total federal tax from the sale$68,400

Because this seller's ordinary income already sits above the 24 percent bracket, the whole $120,000 lands at the 25 percent ceiling. Had that $120,000 been ordinary long-term gain instead, the seller's $300,000 of long-term gain would have filled the $261,600 of 15 percent room and pushed $38,400 into the 20 percent rate: $46,920 in total, against $57,000 here, so recapture costs this seller $10,080. Enter the same figures in the Depreciation Recapture Calculator and it reproduces the $70,320.

Can a 1031 exchange, installment sale, gift or inheritance avoid recapture?

Like-kind exchange (real property only). A qualifying section 1031 exchange defers the gain, recapture included, into the replacement property's carryover basis. Any boot you receive is taxed, and it is taxed first as recapture. Model it with the 1031 Exchange Calculator and read the 1031 Exchange Guide.
Installment sale. Section 453(i) requires all section 1245 recapture, and any section 1250 ordinary recapture, to be reported in the year of sale even if you receive no cash that year. Only the gain above the recapture is spread over the payments. Unrecaptured section 1250 gain is spread, but it is taken into account before the other installment gain. See the Installment Sale Calculator.
Gift. Giving depreciated property away does not trigger recapture for you, but the recipient takes over your basis and must account for your depreciation when they sell. A part-gift, part-sale transfer at a gain triggers recapture up to that gain.
Transfer at death. Publication 544 states that no gain is reported on depreciable property transferred to an estate or beneficiary at death. Heirs generally take a basis equal to fair market value under IRC §1014, so the accumulated depreciation is never recaptured.
Former home or home office. The section 121 home sale exclusion cannot cover gain equal to depreciation allowed or allowable after May 6, 1997 (Publication 523). That portion is unrecaptured section 1250 gain even when the rest of the gain is excluded. See the Home Sale Exclusion Guide.
Charitable bargain sale. Ordinary income from recapture is allocated between the sale and gift portions and reduces the deduction for the gift portion. This is a specialist area.

Where is depreciation recapture reported?

Sales of business and rental property go on Form 4797, not directly on Form 8949.

Part III is where property held more than one year with depreciation is first entered. It figures the section 1245 ordinary income (line 25) or section 1250 additional depreciation (line 26).
Part II collects ordinary gains: the Part III recapture amount, the section 1231 lookback amount from line 8, and the whole gain on property held one year or less.
Part I receives the remaining section 1231 gain, which is netted with other section 1231 items and, if a net gain, flows to Schedule D as long-term gain.
Schedule D line 19 receives unrecaptured section 1250 gain from the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions. The Schedule D Tax Worksheet then applies the rate layers.
Form 8960 computes the net investment income tax, if it applies.

Installment sales use Form 6252 alongside Form 4797, and like-kind exchanges use Form 8824. A sale of a home with a prior office or rental use is reported partly on Form 4797 and partly on Form 8949 when the property was split between business and personal use.

Common mistakes

Assuming recapture is always 25 percent. It is ordinary income on equipment, and on real property 25 percent is only the ceiling.
Forgetting unclaimed depreciation. Allowable depreciation reduces basis whether or not you deducted it.
Subtracting land from the gain. Land is part of cost basis for the gain calculation even though it was never depreciated.
Ignoring the contents. Appliances, furniture and cost-segregated components sold with a building carry section 1245 ordinary recapture, not the 25 percent treatment.
Expecting an installment sale to defer everything. Section 1245 recapture is taxed in the year of sale regardless of when the cash arrives.
Trading in equipment as if it were a 1031 exchange. Since 2018 a trade-in of equipment or a vehicle is a taxable sale.
Missing the lookback. An ordinary section 1231 loss in the last five years converts the same amount of this year's net 1231 gain to ordinary income.
Applying the federal 25 percent cap to state tax. Most states tax the entire gain as ordinary income.

Practitioner Insight (LMN Tax Inc.)

LMN Tax Inc. - Client Pattern

The rental owner who never depreciated is the call we get most often, and it usually arrives after the sale closes. Self-prepared returns, or a preparer who was never told the property was rented, show years of rental income with no depreciation deduction. At sale the basis still has to come down by the allowable amount, so the client owes recapture on deductions they never received. If the sale has not closed, we look at a Form 3115 catch-up in the year of sale, which can recover the missed deductions in one return. The second pattern is equipment-heavy businesses after a big section 179 or bonus year: the owner upgrades trucks or machines two or three years later and is surprised that the trade-in value is ordinary income stacked on top of a strong profit year. We now run a disposal plan alongside every large first-year write-off, because the deduction and the recapture are two halves of the same decision.

When these rules may not apply

Pre-1987 real property: buildings depreciated under ACRS accelerated methods can produce ordinary recapture of some or all of the depreciation rather than unrecaptured section 1250 gain.
Low-income housing and other special real property: applicable percentages and holding-period phase-outs under section 1250 change the ordinary amount.
Partnership and S corporation interests: recapture inside an entity reaches owners through Schedule K-1 and, on a sale of a partnership interest, through the section 751 hot-asset rules.
Involuntary conversions: casualty and condemnation gains that are reinvested under section 1033 limit recapture to the gain recognized, with special carryover rules.
Listed property and vehicles: business use that falls to 50 percent or less triggers recapture of excess depreciation or section 179 while you still own the asset, separate from any sale.
Depreciation on multiple assets in one year: several sales are netted under section 1231 before rates apply; a single-sale estimate will differ.
State tax: state treatment of recapture and capital gains varies and is not covered here.

Frequently Asked Questions

Is depreciation recapture always taxed at 25 percent?

No. The 25 percent figure applies only to unrecaptured section 1250 gain on real property such as a rental or commercial building, and it is a maximum. That gain is taxed at your ordinary bracket rate when the bracket is 24 percent or lower, and at 25 percent only for the part that would otherwise fall in the 32 percent bracket or higher. Recapture on equipment, vehicles and other section 1245 property is ordinary income taxed at 10 to 37 percent with no cap.

Do I have to pay recapture if I never took depreciation on my rental?

Yes. Your basis is reduced by the depreciation allowed or allowable, whichever is greater, so depreciation you were entitled to still lowers your basis and is still recaptured when you sell. Where no depreciation was taken at all, the allowable amount is figured with the straight-line method. You can often recover the missed deductions before the sale by amending returns or by filing Form 3115 for a change in accounting method, which permits a one-year catch-up adjustment.

Is depreciation recapture included in my capital gains?

It is part of the total gain on the sale but it is not taxed at the ordinary long-term capital gain rates. Section 1245 recapture is ordinary income and is reported in Form 4797 Part II. Unrecaptured section 1250 gain is part of the long-term gain that reaches Schedule D, but it is broken out on line 19 and taxed at up to 25 percent rather than 0, 15 or 20 percent.

How long do I have to own property to avoid depreciation recapture?

No holding period eliminates recapture on a sale. Holding more than one year matters because it makes the property section 1231 property: without it, the whole gain is ordinary income. Recapture is avoided only by not recognizing the gain, such as holding the property until death, or deferred by a qualifying 1031 exchange of real property.

Does a 1031 exchange avoid depreciation recapture?

It defers it. In a fully deferred exchange of real property, the gain, including the depreciation component, carries into the replacement property through a lower basis and is recognized when that property is eventually sold in a taxable sale. Boot you receive in the exchange is taxable, and it is taxed first as recapture. Equipment and vehicles cannot be exchanged under section 1031 after 2017.

What happens to depreciation recapture when property is inherited?

IRS Publication 544 states that no gain is reported on depreciable property transferred to an estate or beneficiary at death. The heir generally takes a basis equal to the property's fair market value at death under IRC section 1014, so the decedent's depreciation is not recaptured. If the heir then depreciates the property, recapture starts again on their own deductions.

Does depreciation recapture apply to a home office?

Yes, if you claimed or could have claimed depreciation for the office after May 6, 1997. When you sell the home, the section 121 exclusion can cover the rest of the gain, but not the gain equal to that depreciation. It is taxed as unrecaptured section 1250 gain at up to 25 percent. Taxpayers who used the simplified home office method have no depreciation to recapture for those years.

Is depreciation recapture subject to the net investment income tax?

It can be. The 3.8 percent tax under IRC section 1411 applies to net gain from property held in a passive activity or for investment, which includes the recaptured amount, when your modified AGI exceeds $200,000 single or $250,000 married filing jointly. Gain from property used in a trade or business in which you materially participate is generally excluded.

What To Do Next

Next Step

Gather three numbers before anything else: your original cost including improvements, the depreciation shown on your past returns (Form 4562 or your preparer's depreciation schedule), and your expected net sale price. Then run them through the Depreciation Recapture Calculator to see the layer split and the 2026 tax.

If your returns show no depreciation on a property you rented, deal with that before you sell. The allowable amount is recaptured either way, and only a pre-sale correction recovers the deduction.

If the property is real estate and you plan to stay invested, compare the result against a deferral with the 1031 Exchange Calculator. If you are financing the buyer, check the Installment Sale Calculator, remembering that section 1245 recapture is due in the first year.

If the sale is large, involves several assets, a partnership, cost segregation or a former home, have a tax professional review the Form 4797 allocation before closing.

Sources

IRS Publication 544 (2025), Sales and Other Dispositions of Assets - section 1245 ordinary income as the lesser of depreciation or gain; the light-duty truck example; depreciation allowed or allowable and the straight-line rule when none was taken; section 1250 additional depreciation and the one-year rule; installment sales; gifts, part-gift transfers and transfers at death.
Instructions for Form 4797 (2025) - Parts I, II and III; recapture lines 25 and 26; nonrecaptured section 1231 losses on line 8.
Instructions for Schedule D (2025) - Unrecaptured Section 1250 Gain Worksheet (lines 1 to 18) and Schedule D Tax Worksheet (lines 19 to 21, 35 to 40 and 47).
Revenue Procedure 2025-32 - 2026 tax rate tables (section 4.01), maximum zero and 15 percent rate amounts (section 4.03) and standard deduction (section 4.14).
IRS Publication 946, How To Depreciate Property - allowed or allowable depreciation; correcting missed depreciation by amended return or Form 3115.
IRS Publication 523, Selling Your Home - depreciation after May 6, 1997 cannot be excluded under section 121.
26 U.S.C. §1(h) - 25 percent maximum rate on unrecaptured section 1250 gain and its definition in §1(h)(6) (Cornell LII).
26 U.S.C. §1231 - netting of section 1231 gains and losses and the five-year recapture of net section 1231 losses (Cornell LII).
26 U.S.C. §1245 and §1250 - recapture of depreciation on personal property and real property (Cornell LII).
26 U.S.C. §453(i) - recapture income recognized in the year of an installment sale (Cornell LII).
26 U.S.C. §1411 - net investment income tax and its thresholds (Cornell LII).

Disclaimer: This guide is educational and does not constitute tax, legal, or investment advice. Rules follow IRC §§1(h), 453(i), 1231, 1245, 1250 and 1411, IRS Publications 523, 544 and 946, and the 2025 Instructions for Form 4797 and Schedule D, with 2026 amounts from Revenue Procedure 2025-32. The worked example assumes a single sale, no other capital gains or losses, no prior section 1231 losses and the standard deduction, and excludes state and local tax and the alternative minimum tax. Consult a qualified tax professional before selling depreciated property.

Depreciation Recapture Explained