tax · 2026-05-01
Compute the depreciation recapture tax owed on rental property sale — Section 1250 unrecaptured gain at 25% federal flat plus state.
| Sale price | $750,000 |
| Original cost basis | $350,000 |
| Total depreciation taken | $95,000 |
| Federal recapture rate % | 25% |
| LTCG rate % | 20% |
| State rate % | 6% |
| NIIT rate % | 3.8% |
| Recapture tax (federal) | $23,750 |
| LTCG tax | $80,000 |
| Total gain | $495,000 |
When you sell rental real estate, the IRS "recaptures" the depreciation deductions you took along the way at a special 25% federal rate. This is on top of LTCG on the appreciation portion. Most landlords forget the recapture line item until they see the closing tax projection.
adjusted basis = original basis − depreciation taken
total gain = sale price − adjusted basis
recapture amount = depreciation taken (capped at gain)
LTCG portion = total gain − recapture amountFederal tax stack:
A property held 10 years had ~$95k in depreciation deductions on a $350k purchase. At sale, you owe 25% federal × $95k = $23,750 in recapture, plus LTCG on appreciation, plus state. On a typical sale, recapture alone is 5-8% of sale price.
A 1031 exchange defers BOTH the recapture and LTCG. The depreciation history transfers to the new property; recapture is owed when the new property is eventually sold (or never, if held to death + step-up).
No — the IRS uses 'allowed or allowable' depreciation. Even if you forgot to claim it, recapture is calculated on what you SHOULD have taken. Always file depreciation; you'll be taxed as if you did anyway. Form 3115 can recover missed depreciation in current year if you discover the error before sale.
Section 1245 = personal property (equipment, machinery): full recapture at ordinary rates (up to 37%). Section 1250 = real property: 25% recapture rate (favorable). Most rental real estate is 1250 — 25% is good news compared to 37% ordinary on equipment recapture.
Always — 25% > 20% LTCG max. The recapture portion is the LARGER of the two taxes per dollar of gain. This is why some landlords minimize depreciation deliberately (cost segregation can REDUCE recapture if it shifts to short-life property recapped at full ordinary rate). Talk to a CPA on cost-seg before sale.