Here is the short answer many sellers want before they talk to a professional. The depreciation recapture tax rate works like this: for buildings (Section 1250), the portion of gain attributable to straight-line depreciation is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25%; any additional or accelerated depreciation (and all Section 1245 property such as equipment, vehicles, and many cost-segregated components) is recaptured and taxed at your ordinary income tax rate. Any remaining gain after recapture is taxed at the long-term capital gains rate (0%, 15%, or 20%). A 3.8% Net Investment Income Tax and state income taxes may also apply. Recapture is based on depreciation allowed or allowable—skipping prior deductions does not avoid the tax. That is the depreciation recapture tax rate in plain English.
What should you do with that information? Identify what you are selling (1250 building vs. 1245 equipment/components), total the depreciation you claimed (or could have claimed), compute your adjusted basis and total gain, then apply the rates above. A quick rule of thumb: the lesser of total depreciation or total gain is taxed first as recapture (at 25% for unrecaptured 1250 straight-line or at ordinary rates for 1245/accelerated amounts), and the rest of the gain falls to the long-term capital gains brackets. The mini-worksheet below lets most owners estimate their exposure in about 30 seconds.
What is the depreciation recapture tax rate? (fast answer)
For federal purposes, two concepts drive your rate: the code section that covers the asset and the type of depreciation you used.
- Section 1250 (real property like buildings and structural components): the part of your gain attributable to straight-line depreciation becomes unrecaptured Section 1250 gain, taxed at a maximum 25% federal rate. Any “additional” depreciation beyond straight-line (uncommon on post-1986 buildings) would be recaptured as ordinary income.
- Section 1245 (personal property like equipment, furniture, machinery, vehicles, and many cost-segregated components): to the extent of depreciation taken, gain is recaptured at your ordinary income tax rate. There is no 25% cap on 1245 recapture.
- After recapture, any remaining gain is taxed as long-term capital gain (0%, 15%, or 20%) if you held the property for more than one year.
- In addition, the 3.8% Net Investment Income Tax (NIIT) can apply if your modified adjusted gross income exceeds the threshold for your filing status, and many states tax recapture as ordinary income.
- Recapture is computed on depreciation allowed or allowable. Choosing not to claim depreciation doesn’t remove recapture exposure.
Below is a simple comparison to anchor the rules by asset type.
| Asset type | Typical examples | Portion of gain taxed as recapture | Federal rate cap on that portion | Where reported | Notes (NIIT/state) |
|---|---|---|---|---|---|
| 1250 building (straight-line) | Commercial building, multifamily, shell/structure | Up to total straight-line depreciation | Max 25% (unrecaptured 1250) | Form 4797 for sale; unrecaptured 1250 portion ultimately shows on Schedule D | NIIT may apply to total net investment income; states often tax this portion at ordinary rates |
| 1250 building (accelerated, older assets) | Pre-1987 accelerated methods on real property | “Additional” depreciation over straight-line | Ordinary income rates | Form 4797 | Rare for modern assets; check historic schedules |
| 1245 equipment/fixtures | Machinery, furniture, appliances, tenant equipment | Up to total depreciation (including bonus/179) | Ordinary income rates (no 25% cap) | Form 4797 for recapture; any remaining LTCG to Schedule D | NIIT and state rules can stack on top of federal |
| Land | Land component of purchase | None (no depreciation) | N/A | Schedule D for capital gain | No recapture, but gain may face state and NIIT |
How to calculate depreciation recapture (3-step worksheet + example)
Use this quick worksheet to estimate your exposure in under a minute.
- Gather inputs (write or enter these): purchase price, land allocation, improvements, total depreciation taken (separate 1250 vs 1245 if you have a cost segregation), sales price, selling costs, holding period, your estimated marginal tax rate, NIIT exposure, and your state rate.
- Compute adjusted basis: original cost minus land allocated to it is not depreciated? For basis, include both land and building/improvements at cost. Then subtract total depreciation claimed. Add capitalized improvements you made.
Adjusted basis = (Original cost + capital improvements) − total depreciation. - Compute gain and split:
- Amount realized = sale price − selling costs.
- Total gain = amount realized − adjusted basis.
- Recapture = lesser of total depreciation and total gain. Allocate recapture between Section 1245 (ordinary) and 1250 straight-line (25% cap) based on what created the depreciation. Any remaining gain after recapture is long-term capital gain if held >1 year.
Worked Example A: Building only (no cost segregation)
• Purchase price 1,000,000 (land 200,000, building 800,000).
• Capital improvements 50,000. Total depreciation taken over the years 200,000 (straight-line).
• Selling price 1,300,000; selling costs 60,000.
• Adjusted basis = (1,000,000 + 50,000) − 200,000 = 850,000.
• Amount realized = 1,300,000 − 60,000 = 1,240,000.
• Total gain = 1,240,000 − 850,000 = 390,000.
Split the gain:
• Recapture as unrecaptured 1250 gain (max 25%) = lesser of depreciation 200,000 or total gain 390,000 = 200,000.
• Remaining long-term capital gain = 390,000 − 200,000 = 190,000.
Illustrative federal liability (ignoring NIIT/state for the moment):
• 1250 portion: up to 25% of 200,000 = up to 50,000.
• LTCG portion: 190,000 × your LTCG bracket (0%, 15%, or 20%). If in the 15% bracket, 190,000 × 0.15 = 28,500.
NIIT and state layer on top. If subject to NIIT, apply 3.8% to net investment income. Many states tax both the 1250 portion and the LTCG portion at ordinary state rates, though states differ in details.
Worked Example B: Building with cost segregation (mix of 1245 and 1250)
Assume the same facts as Example A, except a prior cost segregation classified 150,000 of interior fixtures as Section 1245 and accelerated depreciation increased total depreciation to 300,000 (of which 150,000 was 1245 components and 150,000 was 1250 straight-line).
• Adjusted basis = (1,000,000 + 50,000) − 300,000 = 750,000.
• Total gain = 1,240,000 − 750,000 = 490,000.
• Recapture split:
– Section 1245 ordinary-income recapture up to depreciation on 1245 components = 150,000 taxed at your ordinary rate.
– Unrecaptured Section 1250 gain up to straight-line on the building = 150,000 taxed at up to 25%.
• Remaining LTCG = 490,000 − 150,000 − 150,000 = 190,000 taxed at 0/15/20%.
Because the 1245 amount is taxed at ordinary rates, the total bill is usually higher in a cost-seg scenario when you sell, even though cost seg can accelerate deductions and improve cash flow while you own the property. For more on modeling that tradeoff, see our owner’s guide to cost segregation: Cost segregation for commercial real estate: 2026 owner’s guide and this companion article on studies and compliance: Cost segregation study: a 2026 guide for commercial real estate owners.
Quick side scenario: equipment or vehicle
• Original cost 70,000; depreciation taken 60,000; adjusted basis 10,000.
• Sold for 40,000 → gain = 40,000 − 10,000 = 30,000.
• Entire 30,000 is Section 1245 recapture at your ordinary rate; no LTCG remains.
30‑second mini‑worksheet (checklist)
- Inputs: purchase price; land allocation; improvements; total depreciation (split 1245 vs 1250 if applicable); sales price; selling costs; holding period; marginal tax rate; NIIT status; state rate.
- Step 1: adjusted basis = original cost + improvements − depreciation.
- Step 2: total gain = net sale proceeds (price − selling costs) − adjusted basis.
- Step 3: recapture = lesser of total depreciation and total gain. Allocate first to 1245 (ordinary), then to 1250 straight-line (25% cap). Remaining gain is long-term capital gain.
- Step 4: compute federal tax on each bucket, then apply NIIT and state taxes if relevant.
Property types and methods: Section 1245 vs 1250, cost segregation, vehicles
Section 1250 real property includes buildings and their structural components. For modern assets depreciated using straight-line, the building’s depreciation creates unrecaptured Section 1250 gain (capped at 25%) when you sell at a gain. Older real property that used accelerated methods can trigger ordinary-income recapture on the “additional” depreciation beyond straight-line. Structural components normally remain 1250; however, if a cost segregation study properly classified certain items as personal property, those items are usually Section 1245.
Section 1245 property includes equipment, machinery, tools, furniture, appliances, vehicles, dedicated process electrical and plumbing, many interior finishes and specialty fixtures that a cost segregation might identify, and similar personal property. On sale, depreciation up to your gain is recaptured as ordinary income. This includes amounts expensed using bonus depreciation or Section 179. Section 179 and bonus are powerful timing tools during ownership, but both are subject to ordinary-income recapture when you dispose of the asset at a gain.
Vehicles and equipment are nearly always Section 1245, so their gain up to depreciation is ordinary income. If you sell for less than adjusted basis, you generally recognize an ordinary loss instead (subject to business vs. personal use rules).
Land is not depreciable and has no recapture. Its gain or loss is generally capital in nature.
Owners who plan to execute a cost segregation study should also plan for the exit. Accelerating deductions can improve near-term cash flow, but more 1245 property typically raises ordinary-income recapture upon sale. Pairing that strategy with deferral tools (discussed below) or a long hold can align cash taxes with your investment plan. If you own or plan to sell income property, see our overview of timing strategies in A 2026 Guide to commercial real estate tax planning.
Reporting and timing: forms, installment sales, and holding periods
Where to report: Use Form 4797 to report the sale of business property. Section 1245 recapture is computed on Form 4797 and taxed as ordinary income. The unrecaptured Section 1250 portion is identified in the Form 4797/Schedule D flow and taxed at up to 25%. Any remaining long-term capital gain is shown on Schedule D.
Installment sales: Even if you receive payments over time, Section 1245 recapture and any unrecaptured 1250 gain are recognized in the year of sale to the extent of gain, not as payments are collected. Only the capital gain portion can be spread via the installment method.
Holding period: Your holding period changes only the tax rate on the non‑recapture portion. Recapture rules apply regardless of holding period. If you hold more than one year, the remaining gain after recapture may qualify for long-term capital gain rates.
Records to keep: Preserve purchase documents, land/building allocations, improvement invoices, depreciation schedules (including cost segregation reports), and closing statements with selling costs. These support your adjusted basis, recapture computation, and reporting positions.
Legal ways to reduce or defer taxes
There is no silver bullet, but planning and timing can make a meaningful difference.
- Time the sale: Consider selling in a year when your ordinary rate and NIIT exposure may be lower, or when capital losses can offset net capital gains.
- Harvest capital losses: Losses on investments can offset capital gains (including the non‑recapture portion). Loss rules are detailed; coordinate with a professional.
- 1031 like‑kind exchanges: A properly executed exchange can defer both capital gains and the recognition of depreciation recapture by rolling basis into the replacement property. Strict rules and timelines apply; consult a qualified accommodator early.
- Qualified Opportunity Funds (QOFs): Investing an eligible gain in a QOF within the allowed period may defer part of your capital gain and potentially reduce tax on future QOF growth if you meet holding requirements. This does not convert ordinary 1245 recapture, so model carefully.
- Hold to death (basis step‑up): Under current law, assets included in a decedent’s estate may receive a basis step‑up, which can remove built‑in gain. Estate, state, and family considerations are significant; get advice.
For small-business owners who regularly buy and sell equipment or leasehold improvements, it also helps to weave recapture planning into your annual process. See our practical overview here: Small business tax planning: A Practical Year-Round Guide.
State taxes, NIIT, and other surcharges
State income taxes: Many states tax depreciation recapture at ordinary state income tax rates. Some states do not tax capital gains differently from ordinary income, so both the recapture and residual capital gain may be taxed at the same rate. A few states have special rules; verify the treatment in your state.
NIIT (3.8%): The NIIT may apply to net investment income if your modified adjusted gross income exceeds the threshold for your filing status. For many real estate owners, rental income and capital gains are part of net investment income unless you meet exceptions such as certain real estate professional or materially-participating trade or business scenarios. NIIT can apply to the unrecaptured 1250 portion and the capital gain portion; whether it applies to the 1245 ordinary portion depends on your facts and whether the activity is considered a trade or business in which you materially participate.
Example stacking (using Example A figures and illustrative rates): Suppose you are in the 24% ordinary bracket, 15% LTCG bracket, subject to NIIT, and live in a 5% state that taxes recapture and capital gains the same way.
- 1250 unrecaptured: 200,000 × 25% = 50,000 federal; NIIT 3.8% = 7,600 if included in net investment income; state 5% = 10,000. Indicative subtotal = 67,600.
- LTCG: 190,000 × 15% = 28,500 federal; NIIT 3.8% = 7,220; state 5% = 9,500. Indicative subtotal = 45,220.
- Total indicative tax = 67,600 + 45,220 = 112,820 (your facts may differ; NIIT applicability can vary).
Change the facts and the picture changes quickly. If you were in the top ordinary bracket and top LTCG bracket, or if more of your gain were 1245 ordinary recapture, the combined bill would rise.
Common mistakes that cost sellers money
- Not separating land and building: Land is not depreciable. Failing to allocate at purchase or on sale can distort basis and recapture.
- Missing selling costs: Commissions, legal and title fees, escrow, transfer taxes, and certain repairs related to sale reduce gain when properly documented.
- Thinking “I didn’t claim it, so I don’t owe it”: The law uses depreciation allowed or allowable. If you could have claimed it, the IRS still treats it as taken for recapture purposes.
- Misclassifying cost‑segregated assets: Items properly classified as Section 1245 are ordinary-income recapture on sale. Keep your study and fixed asset detail.
- Ignoring partial asset dispositions: When you replace a roof or major system, partial dispositions and retirements can affect basis and later recapture. Track them.
- Overlooking installment sale recapture: Recapture is recognized in year one even if you collect payments over time.
FAQs on depreciation recapture tax rates
How do I figure depreciation recapture?
Compute adjusted basis, total gain, and then the recapture as the lesser of total depreciation and gain. Allocate recapture first to 1245 ordinary items, then to unrecaptured 1250 straight-line for buildings. Tax the remainder as long-term capital gain if held more than one year.
Do you have to pay back depreciation on rental property?
Not literally “pay back,” but the law taxes gain up to the amount of depreciation as recapture when you sell at a gain. For buildings, straight-line recapture is unrecaptured 1250 gain at up to 25%. For 1245 property and accelerated amounts, it is ordinary income.
Is depreciation recapture subject to the 3.8% NIIT?
NIIT can apply to net investment income, which includes many rental gains. Whether it applies to your recapture depends on your income and participation in the activity. Work with a professional to evaluate your specific situation.
What is the depreciation recapture tax rate for vehicles or equipment?
Vehicles and equipment are Section 1245. Gain up to depreciation is recaptured at your ordinary income rate. Any remaining gain after that is generally capital gain.
Has the depreciation recapture tax rate changed for 2025–2026?
Under current law, unrecaptured 1250 gain remains capped at 25%, Section 1245 recapture remains ordinary income, and long-term capital gains remain at 0%, 15%, or 20% based on income brackets. Check the latest IRS instructions each year for any updates to thresholds or forms.
What’s the difference between Section 179 and bonus depreciation, and how do they affect recapture?
Both are ways to expense the cost of qualifying 1245 property faster. Section 179 has annual limits and business income constraints; bonus depreciation follows statutory phase‑down schedules. On sale, amounts previously expensed under either approach are part of total depreciation and are recaptured at ordinary rates up to your gain.
If you are planning a sale or evaluating whether cost segregation makes sense for a current building, it is worth pairing the math in this article with a broader tax plan. This overview of strategies is a good next read: A Practical Guide to commercial property tax planning for Investors and Operators.