Tax Code 1250: Recapture Calculation, Rates, and Deferrals

When you sell depreciated real estate at a profit, Section 1250 depreciation recapture taxes the portion of your gain equal to the straight-line depreciation you claimed at a federal rate of up to 25%, while the rest of the gain gets the normal long-term capital gains rates of 0%, 15%, or 20%. For properties placed in service before 1987 that used accelerated depreciation, any depreciation above what straight-line would have produced is recaptured as ordinary income at your marginal rate, which tops out at 37% in 2026.1Internal Revenue Service. Federal Income Tax Rates and Brackets High earners owe an additional 3.8% on top.

What Section 1250 Covers

Section 1250 applies to depreciable real property: buildings and their structural components such as roofs, HVAC, plumbing, and electrical systems.2Office of the Law Revision Counsel. 26 U.S. Code 1250 – Gain From Dispositions of Certain Depreciable Realty Both residential rentals and commercial buildings fall under it. Land does not. Land cannot be depreciated, so it sits outside these rules entirely, which is why you allocate purchase price between land and building at acquisition and depreciate only the building portion.

Personal property inside or around the building is a different regime. Appliances, carpeting, cabinetry, parking lot paving, and landscaping are usually Section 1245 property, and their recapture rules are harsher. More on that boundary below.

How the Recapture Amount Is Calculated

Three numbers drive the math: your net selling price, your original cost basis, and the total depreciation you claimed over the years. Subtract accumulated depreciation from original cost to get your adjusted basis. Subtract the adjusted basis from the net selling price to get your total realized gain.

The unrecaptured Section 1250 gain is the lesser of two figures: your total realized gain, or your total accumulated depreciation. Whichever is smaller is the slice taxed at the 25% rate. Anything above that is taxed at standard long-term capital gains rates.

A worked example. You bought a commercial building for $750,000 (building only, land excluded) and claimed $150,000 in straight-line depreciation. Your adjusted basis is now $600,000. You sell for a net price of $900,000:

  • Total realized gain: $900,000 − $600,000 = $300,000
  • Unrecaptured Section 1250 gain (the lesser of $300,000 or $150,000): $150,000, taxed at up to 25%
  • Remaining long-term capital gain: $150,000, taxed at standard LTCG rates

Change the sale price to $650,000 and the picture shifts. The total gain shrinks to $50,000, which is less than the $150,000 in depreciation claimed. All $50,000 is unrecaptured Section 1250 gain taxed at up to 25%. None of it gets the lower capital gains rates.

Sell below the $600,000 adjusted basis and there is no recapture at all, because there is no gain. The loss is treated as an ordinary loss under Section 1231 and can offset other income on your return.3Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions

The Rate Stack

Gain from a Section 1250 sale is taxed in layers, from least favorable down:

The 25% figure is a ceiling, not a flat rate. If your marginal bracket is below 25%, you pay your actual marginal rate on the unrecaptured portion. Most sellers of depreciated real estate have enough income for the 25% cap to be the number that actually applies.

For properties placed in service after 1986, the IRS requires straight-line depreciation, so no “excess” exists and the ordinary income layer is zero. This is the situation almost every current investor is in. The pre-1987 accelerated depreciation rules matter only for the shrinking pool of older properties still trading hands.

The 3.8% Net Investment Income Surtax

High-income sellers owe another 3.8% on top under IRC Section 1411. The surtax hits net investment income, including both the unrecaptured Section 1250 portion and the remaining long-term capital gain, when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.6Internal Revenue Service. Net Investment Income Tax The effective federal rate on the recapture portion reaches 28.8%, and the remaining capital gain portion can hit 23.8%.

The Section 1245 Boundary

Not everything inside the property is Section 1250. Section 1245 property, which covers appliances, carpeting, cabinetry, parking lot paving, landscaping, and similar items, is recaptured differently: the entire gain attributable to depreciation is ordinary income at your full marginal rate, uncapped.

This is what makes cost segregation studies a two-sided decision. An engineer reclassifies building components into shorter depreciation schedules (5, 7, or 15 years instead of 27.5 or 39), which accelerates deductions during the holding period. The trade is that those reclassified components face full Section 1245 ordinary income recapture at sale rather than the 25% Section 1250 treatment. Modeling the exit-year tax impact before committing to cost segregation is worth doing.

Installment Sales Do Not Spread the Recapture

If you sell on installments and collect payments over several years, the recapture tax does not spread with them. The IRS requires the full depreciation recapture to be recognized in the year of sale, regardless of how little cash you actually receive that year.7Internal Revenue Service. Topic No. 705, Installment Sales Only the remaining long-term capital gain portion qualifies for installment treatment and gets spread over the payment period. If you are structuring an installment deal on depreciated property, budget the full recapture bill for year one.

Transactions That Defer or Eliminate the Tax

Several moves push the recapture liability into the future, and one erases it entirely.

Section 1031 Like-Kind Exchange

A properly structured exchange of one investment or business real property for another defers all gain, including the depreciation recapture portion. Since the Tax Cuts and Jobs Act, only real property qualifies.8Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment The replacement property takes a reduced basis that carries the deferred recapture forward. Depreciation from both properties eventually factors into recapture when you sell in a taxable transaction.

Boot changes this. If you receive cash, debt relief, or other non-like-kind property, gain is recognized up to the value of the boot, and the recapture tax applies to that recognized gain first. Receive $50,000 in boot with $80,000 of unrecaptured Section 1250 gain sitting in the property, and the full $50,000 is taxed at the 25% recapture rate before any of it touches the lower capital gains rate.

Step-Up at Death

This is the one exit that permanently eliminates the recapture liability rather than deferring it. Inherited property receives a basis step-up to fair market value on the date of the owner’s death.9Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Every dollar of accumulated depreciation is wiped from the tax picture. An investor who claimed $200,000 in depreciation on a property worth $1 million at death leaves an heir with a $1 million basis and no recapture obligation.

Lifetime Gifts

Gifting property avoids immediate recapture because the transfer is not a sale, but the recipient takes your adjusted basis and inherits the full depreciation history along with it.10Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust When they sell, they owe the recapture you would have owed. The liability moves with the property.

Involuntary Conversions

If the property is destroyed, condemned, or stolen and you reinvest the proceeds into similar replacement property within the required window, gain and recapture are deferred, with the replacement carrying a reduced basis. Pocket the proceeds instead and the recapture applies to the recognized gain.

Where the Gain Gets Reported

Reporting starts on Form 4797, Sales of Business Property. Part III handles Section 1250 recapture and separates any ordinary income portion from the rest.11Internal Revenue Service. Instructions for Form 4797 For post-1986 properties, the ordinary income portion is typically zero and the real work happens on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions. The worksheet result flows to line 19 of Schedule D, where it feeds the tax calculation.12Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)

For installment sales, Form 6252 handles the annual allocation, with the unrecaptured Section 1250 amount applied first until fully used up.13Internal Revenue Service. Form 6252, Installment Sale Income