Depreciation Recapture Tax (Sec 1250)
When you sell rental property, accumulated depreciation deductions are 'recaptured' at max 25% federal rate (IRC 1250). Plus any remaining gain at LTCG rate.
| Adjusted basis | — |
| Net sale amount | — |
| Total gain | — |
| Section 1250 recapture | — |
| Recapture tax (25%) | — |
| Remaining LTCG | — |
| LTCG tax | — |
| Total federal tax | — |
| Proceeds after tax | — |
When you sell rental real estate, the IRS taxes 'unrecaptured Section 1250 gain' — the depreciation you claimed during ownership — at a maximum 25% federal rate (IRC Section 1250). Any remaining gain is taxed at standard long-term capital gains rates (0/15/20%).
Why Recapture Exists
While you owned the rental, depreciation deductions reduced your taxable income — effectively a tax shelter. When you sell, the IRS 'recaptures' the prior tax savings by taxing the depreciation as a special category. Per IRC 1250, this gain is taxed at a max federal rate of 25%.
Section 1250 vs Section 1245
Section 1250 (real property): max 25%. Section 1245 (personal property like equipment): ordinary income rate (up to 37%). Most real estate falls under 1250. Cost-segregated short-life components might fall under 1245.
1031 Exchange to Defer
A Section 1031 like-kind exchange defers BOTH the LTCG and the depreciation recapture indefinitely. Roll proceeds into new investment property within 45/180 day deadlines. On final sale (or step-up at death), all taxes potentially eliminated.
State Tax on Recapture
State tax adds 0-13% on top of federal. CA, NY, NJ tax recapture as ordinary income (high rate). Florida, Texas, Tennessee, etc. have no state income tax. Factor state into total tax calculation.
Last updated May 2026. Sources: IRS Pub 544 (Sales of Property), IRC Section 1250.