By Income Tax Service Editorial — Reviewed by Diyan Yap, EA (IRS Enrolled Agent) — Updated August 10, 2026
Quick answer: When you sell depreciated property, the depreciation you already deducted gets “recaptured.” Equipment and other Section 1245 property is recaptured as ordinary income, up to a 37% marginal rate. Depreciation on real estate is “unrecaptured Section 1250 gain,” taxed at a maximum 25% rate, with any remaining gain taxed at normal long-term capital gains rates.
Key facts:
- §1245 property (equipment, personal property): recapture taxed as ordinary income, up to 37%
- §1250 property (real estate): unrecaptured §1250 gain capped at a maximum 25% rate
- Gain above the recaptured amounts is taxed at long-term capital gains rates of 0%, 15%, or 20%
- Recapture applies whether or not you used cost segregation or a 1031 exchange
- A 1031 exchange defers recapture along with the rest of the gain — it does not eliminate it
Recapture is the bill that arrives with the deduction. Depreciation reduced your taxable income while you held the property; at sale, the tax code claws back the benefit at rates that depend entirely on what kind of property generated it.
What is depreciation recapture?
Depreciation recapture is the tax on gain attributable to depreciation deductions you previously claimed. Every year you depreciate a property, your adjusted basis falls. A lower basis means a larger gain at sale — and the portion of that gain created by depreciation is taxed under its own rules rather than at plain long-term capital gains rates.
The important consequence: you cannot avoid recapture by not claiming depreciation. Depreciation on business and rental property is not optional in the way people assume, and skipping it generally leaves you worse off — you lose the yearly deduction and can still face recapture-style treatment for depreciation “allowable” on the property.
Recapture is also indifferent to how you got the deductions. Straight-line schedules, 100% bonus depreciation, and cost segregation all feed the same reckoning at sale.
What is the difference between Section 1245 and Section 1250 recapture?
The rate. Section 1245 covers personal property — equipment, machinery, furnishings, and the short-life components a cost segregation study carves out of a building. Depreciation on that property is recaptured as ordinary income, meaning it stacks into your bracket and can be taxed as high as 37%.
Section 1250 covers real property — the building itself. Depreciation taken on it becomes “unrecaptured §1250 gain,” which is taxed at a maximum 25% rate. Any gain beyond the depreciation piece is ordinary long-term capital gain.
| Gain component | Property type | 2026 tax treatment |
|---|---|---|
| Depreciation on equipment and short-life components | §1245 property | Ordinary income, up to 37% |
| Depreciation on the building | §1250 property | Unrecaptured §1250 gain, maximum 25% |
| Appreciation above original cost | Capital gain | Long-term rates of 0%, 15%, or 20% |
That rate spread is why accelerating deductions into 5-, 7-, and 15-year classes is a trade rather than a free win: a cost segregation study converts slow 25%-capped depreciation into fast deductions that can come back at ordinary rates. For a high-bracket owner holding briefly, that math can flip.
How is depreciation recapture calculated? (worked example)
Recapture is calculated by splitting total gain into its components, then applying each component’s rate.
Elena bought a rental property for $400,000 and sells it in 2026 for $600,000. Over her holding period she claimed $130,000 of depreciation on the building plus $20,000 on segregated short-life components:
- Adjusted basis: $400,000 − $150,000 total depreciation = $250,000
- Total gain: $600,000 − $250,000 = $350,000
- $20,000 of §1245 component depreciation → recaptured as ordinary income
- $130,000 of building depreciation → unrecaptured §1250 gain, maximum 25% rate
- Remaining $200,000 → long-term capital gain at 0%, 15%, or 20% depending on taxable income
Three notes keep this honest. Sale expenses and improvements adjust the numbers on a real return. The 3.8% net investment income tax can apply on top for higher-income sellers. And §1245 recapture is limited to the gain actually allocable to those components — a badly depreciated asset sold at a loss doesn’t manufacture recapture.
Can a 1031 exchange defer depreciation recapture?
Yes — a 1031 exchange defers recapture along with the rest of the gain, provided the exchange itself qualifies. Nothing is forgiven: the deferred recapture carries into the replacement property’s basis and reappears whenever you sell without exchanging again.
That makes recapture a planning variable rather than a surprise:
- Exchanging again keeps deferral running, which is why long-horizon investors chain exchanges
- Taking cash out (boot) generally triggers tax to the extent of gain, and recapture components are part of what gets taxed
- Selling outright in a low-income year can lower the ordinary-rate portion, though the 25% cap on §1250 gain doesn’t move with your bracket the same way
- Installment sales spread gain across years, but recapture treatment has its own timing rules — check before assuming it stretches evenly
What should you do now?
- Pull your depreciation schedule before listing anything. You cannot estimate recapture without knowing what you’ve already taken.
- Split the gain on paper first — §1245 components, §1250 building depreciation, and true appreciation each carry a different rate.
- Decide the exit structure early. Outright sale, exchange, or installment sale produce very different tax years.
- Weigh acceleration against holding period. Fast deductions on a property you’ll sell in two years can cost more at ordinary rates than they saved.
- Have the numbers run before you sign. A credentialed tax professional (like an IRS Enrolled Agent) can model recapture and estimated payments so the tax isn’t a surprise in April — see quarterly estimated taxes for the payment timing.
FAQ
Can I avoid depreciation recapture by never claiming depreciation?
No. Depreciation on business and rental property is not truly optional, and skipping it generally costs you the annual deduction while still leaving recapture-style exposure at sale.
Is depreciation recapture taxed at 25% on all property?
No. The 25% maximum applies to unrecaptured Section 1250 gain on real property. Section 1245 property such as equipment and short-life building components is recaptured as ordinary income.
Does a 1031 exchange erase recapture?
No. It defers recapture with the rest of the gain, and the liability follows into the replacement property’s basis until a future taxable sale.
Does cost segregation increase my recapture?
It shifts some of it into the ordinary-income category, because the reclassified short-life components are Section 1245 property. The deduction comes faster and the recapture can come back at a higher rate.
What if I sell the property at a loss?
Recapture applies to gain, so a genuine loss on sale is not converted into recapture income. The loss has its own character and limitation rules.
Does the 3.8% net investment income tax apply to recapture?
It can apply to the investment-income portions of a sale for higher-income taxpayers, on top of the recapture and capital gains rates.
Sources
- IRS Publication 946: How to depreciate property
- IRS Topic 409: Capital gains and losses
- IRS: Like-kind exchanges and real estate tax tips
This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change and individual situations vary — consult a qualified tax professional about your specific circumstances.