Section 1245 vs 1250 Depreciation Recapture Comparison
Compare federal tax on the sale of business or rental property under IRC §1245 (personal property — full ordinary-income recapture) versus IRC §1250 (real property — 25% unrecaptured cap with the remainder at long-term capital gain rates). Free, private, no sign-up.
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Section 1245 vs Section 1250 — what's the difference?
When you sell business or investment property at a gain, the IRS first "recaptures" depreciation you have claimed and taxes that portion at ordinary or special rates instead of the favorable long-term capital gain rate. Which Section applies depends on the asset:
Section 1245 property is depreciable personal property — equipment, machinery, vehicles, computers, off-the-shelf software, intangibles like patents and copyrights, livestock, single-purpose agricultural structures, and certain elevators and escalators. When sold, all depreciation previously taken (including bonus depreciation and §179 expensing) is "recaptured" as ordinary income up to the total gain. Any remaining gain above prior depreciation is long-term capital gain.
Section 1250 property is depreciable real property — residential rental property (27.5-year MACRS), commercial buildings (39-year), and their structural components. Section 1250 recapture is a vestigial concept since the elimination of accelerated real estate methods; today, the depreciation portion is taxed as "unrecaptured §1250 gain" at a maximum federal rate of 25% rather than ordinary income.
Worked example: selling rental property for $350,000
Suppose you bought a residential rental for $250,000, took $80,000 of straight-line depreciation, and sell for $350,000. Adjusted basis = $250,000 − $80,000 = $170,000. Total gain = $350,000 − $170,000 = $180,000.
Under §1250, the first $80,000 of gain is "unrecaptured §1250 gain" taxed at the lesser of 25% or your ordinary rate. The remaining $100,000 is taxed at the LTCG rate (0/15/20%). At 24% ordinary / 15% LTCG, the tax is $80,000 × 25% + $100,000 × 15% = $20,000 + $15,000 = $35,000.
If the same $350,000 sale had been §1245 property (e.g., a single-purpose farm building or business equipment), the full $80,000 of recapture would be taxed as ordinary income. At 24% bracket: $80,000 × 24% + $100,000 × 15% = $19,200 + $15,000 = $34,200. At 37% bracket: $80,000 × 37% + $100,000 × 20% = $29,600 + $20,000 = $49,600. High-bracket taxpayers see meaningful savings under §1250.
NIIT, state, and 1031 exchange strategy
On top of federal regular tax, the 3.8% Net Investment Income Tax (NIIT) applies to gain on rental real estate for higher-income taxpayers (MAGI over $200K single / $250K MFJ). State income tax also applies; states do not have separate recapture rules but tax the federal gain. Total marginal tax on the recapture portion of a rental sale can reach 33.8% federal (25% + 3.8% + state) — still better than the 40.8% top §1245 marginal (37% + 3.8%).
A 1031 like-kind exchange defers the entire gain (including both recapture and LTCG components) as long as you reinvest in like-kind real property within strict deadlines. Cost segregation studies during ownership shift portions of a building's basis into §1245 5- and 15-year property — this increases bonus depreciation deductions during ownership but also means more ordinary-rate recapture on a future sale unless deferred via §1031.
Source: irs.gov — Publication 544 (Sales and Dispositions) and Form 4797 instructions. Updated May 2026 reflecting OBBB (P.L. 119-21).