Depreciation Recapture Tax Guide 2025
Understand the Section 1250 recapture tax (your ordinary rate, up to 25%) and strategies to minimize it when selling rental property
Our editorial team writes these guides directly from the IRS source material. This guide explains exactly how recapture works and the legal strategies to reduce or defer this tax.
How is depreciation recapture tax calculated when selling rental property?
When selling rental property, depreciation recapture is taxed at a maximum rate of 25% (Section 1250). Calculate by taking the lesser of: total depreciation allowed or allowable (claimed, or that you could have claimed) on the building OR total gain on sale. This amount is taxed separately from capital gains, which are taxed at 0%, 15%, or 20%.
- •25% maximum recapture rate (Section 1250)
- •Taxed whether you claimed depreciation or not
- •1031 exchange can defer recapture indefinitely
- •Stepped-up basis at death eliminates recapture
Depreciation recapture is the IRS's most predictable surprise. The deductions you took every year (and the ones you 'should have taken') get clawed back at sale, capped at 25% under Section 1250. The investors who get blindsided are usually the ones who never modeled their exit.
Real-world scenario
Landlord sells $580K rental after 14 years, $112K total depreciation taken
Purchase 2012: $310K. Sold 2026: $580K. Cumulative depreciation: $112K, which lowers the basis to $198K, so the gain is $382K. For a married couple filing jointly with $150K of other income, the $112K of Section 1250 gain is taxed at their 22% and 24% bracket rates: $25,008. The other $270K is long-term gain at 15%: $40,500. NIIT of 3.8% on the $282K of income above the $250K threshold: $10,716. Total federal tax at sale: about $76K, before state. They'd budgeted for ~$24K and were short about $52K at closing.
The part most people miss
Form 3115 (Change in Accounting Method) lets you 'catch up' missed depreciation in a single year via a §481(a) adjustment — without amending past returns. If you've owned a rental for years and skipped depreciation, file 3115 BEFORE selling. Done after sale, you've already triggered the recapture without ever getting the deductions.
Recapture Tax Rates at a Glance
What is Depreciation Recapture?
When you sell a rental property, the IRS "recaptures" the depreciation deductions you took during ownership. This means the depreciation that reduced your taxable income over the years is now taxed at your ordinary income rate, but never more than 25%.
Critical Point
The IRS recaptures depreciation whether you claimed it or not. If you forgot to claim depreciation, you still owe recapture tax on the "allowed or allowable" amount. Always claim your depreciation!
How Gain is Taxed When You Sell
Depreciation Recapture (your rate, up to 25%)
Taxed first, on the building depreciation allowed or allowable, up to your gain
Capital Gains (0%, 15%, or 20%)
Remaining gain taxed at long-term capital gains rates
Net Investment Income Tax (3.8%)
Additional tax if AGI exceeds $200K single / $250K married
Complete Calculation Example
Property Details
Step 1: Calculate Adjusted Basis
Step 2: Calculate Total Gain
Step 3: Allocate Gain & Calculate Taxes
Assumes a single filer with about $250,000 of taxable income before the sale, so the recapture sits above the 24% bracket and hits the 25% cap. At lower incomes it is taxed at your ordinary bracket rate instead, which can be much less.
Strategies to Minimize Recapture Tax
1031 Exchange
Defer ALL taxes (recapture + capital gains) by exchanging into a like-kind property. The deferred depreciation carries forward to the replacement property.
Learn about 1031 exchanges →Installment Sale
Spread the gain over multiple years by receiving payments over time. This can keep you in lower tax brackets and spread out the recapture tax burden.
Die and Step Up
At death, heirs receive a stepped-up basis eliminating both capital gains AND depreciation recapture. This is the only way to avoid recapture entirely.
Common Misconceptions
- ✗
"I didn't claim depreciation, so I don't owe recapture"
Wrong. The IRS taxes "allowed or allowable" depreciation. You owe recapture on what you SHOULD have claimed.
- ✗
"Converting to primary residence avoids all taxes"
Only partially. You may exclude up to $250K/$500K of CAPITAL GAINS, but depreciation recapture still applies.
Sources & References
Primary references used for this content
Sales and Other Dispositions of Assets
Gain/loss character, recapture, and like-kind exchanges
View on irs.gov
Sales of Business Property
Business-property gain and depreciation recapture
View on irs.gov
Gain from dispositions of depreciable realty
Unrecaptured §1250 gain, taxed at ordinary rates up to 25%
View on law.cornell.edu
✓3 primary sources; links re-checked on a weekly rotation by the source watcher