Unrecaptured Section 1250 gain is the slice of profit from selling depreciable real estate that equals the depreciation you previously claimed, and it is taxed at a maximum federal rate of 25%.1Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Any gain above that depreciated amount is taxed at the standard long-term capital gains rates of 0%, 15%, or 20%. High-income sellers may owe an additional 3.8% net investment income surtax on top of both pieces.
Why This Gain Exists
When you own investment real estate, the tax code lets you deduct depreciation each year against your rental income. Residential rental property is depreciated straight-line over 27.5 years; nonresidential real property over 39 years.2Internal Revenue Service. Instructions for Form 4562 (2025) Every dollar of depreciation reduces your cost basis in the building, so when you sell, more of the sale price shows up as taxable gain.
Section 1250 property covers any depreciable real property: residential rentals, office space, warehouses, and retail buildings.3Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty Land is not included, because the code treats it as a permanent asset that does not wear out.4Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Only the building portion of your original purchase price feeds the depreciation calculation.
The total of all those yearly deductions is your accumulated depreciation. That number is what drives the recapture.
How to Calculate the Amount
Start with your adjusted basis: original cost, plus capital improvements, minus all accumulated depreciation. Subtract selling expenses like commissions, title fees, transfer taxes, and legal costs from the sale price to get the net amount realized. The difference between the net amount realized and your adjusted basis is your total recognized gain.
Unrecaptured Section 1250 gain is the lesser of two figures: your total recognized gain, or your accumulated depreciation.1Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed In most profitable sales, accumulated depreciation is the smaller number, so recapture equals the full depreciation you claimed. The lesser-of rule only bites when a property barely appreciated.
One detail catches people out. The IRS uses depreciation “allowed or allowable,” not just what you actually deducted. If you owned a rental for years and never claimed depreciation you were entitled to, the IRS still treats that depreciation as having reduced your basis. Skipping the deduction does not spare you from recapture.
How the 25% Rate Actually Works
The 25% figure is a ceiling, not a flat rate. If your overall taxable income puts you in an ordinary bracket below 25%, you pay your ordinary rate on the unrecaptured Section 1250 gain instead.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses For most sellers of six-figure properties, taxable income climbs well past that point in the year of sale, so the 25% cap is what they actually pay. A retiree in a low bracket selling a modest rental could pay less.
Tax on the Gain Above the Depreciation
Anything above your accumulated depreciation is taxed as long-term capital gain, assuming you held the property more than a year. The gain moves through the Section 1231 rules; when Section 1231 gains exceed Section 1231 losses for the year, the net is treated as long-term capital gain.6Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions
For 2026, the long-term capital gains brackets for single filers are:
- 0% on taxable income up to $49,450
- 15% from $49,451 to $545,500
- 20% above $545,500
For married couples filing jointly, the 0% ceiling is $98,900 and the 15% ceiling is $613,700. Most real estate sellers land in the 15% band for the appreciation portion.
Watch the five-year lookback. If you reported net Section 1231 losses in any of the prior five tax years, the current year’s Section 1231 gain is recharacterized as ordinary income up to the amount of those earlier losses.6Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions What you expected to be a 15% capital gain can turn into ordinary income at your marginal rate.
The 3.8% Net Investment Income Surtax
Sellers with higher incomes owe an extra 3.8% on net investment income, including gain from investment real estate.7Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The surtax applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.8Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Those thresholds are fixed in the statute and do not adjust for inflation, so more taxpayers cross them each year.
The surtax applies to both the unrecaptured Section 1250 gain and the remaining capital gain. In effect, a seller topped out at 25% on recapture and 15% on appreciation faces combined federal rates of 28.8% and 18.8%. Overlooking this surtax is one of the most common ways sellers underestimate their bill.
A Worked Example
You bought a rental ten years ago for $600,000, with $100,000 allocated to land. Depreciable basis: $500,000. Over the holding period, you claimed $150,000 in straight-line depreciation.
You sell for $975,000 and pay $25,000 in commissions and closing costs. Net amount realized: $950,000. Adjusted basis: $600,000 minus $150,000, or $450,000. Total recognized gain: $500,000.
Unrecaptured Section 1250 gain is the lesser of $500,000 or $150,000, so $150,000 is taxed at the 25% maximum rate. That is $37,500 of federal tax on the recapture portion.
The remaining $350,000 is long-term capital gain. If your other income places you in the 15% capital gains bracket, that portion adds $52,500. Combined federal tax before the surtax: $90,000.
If your modified AGI clears $200,000, the 3.8% surtax could apply to some or all of the $500,000 gain, adding up to $19,000 more.
How to Report It
The sale goes on Form 4797, which handles sales of business and investment property.9Internal Revenue Service. Instructions for Form 4797 (2025) The unrecaptured Section 1250 gain then carries to Schedule D, where the Unrecaptured Section 1250 Gain Worksheet applies the 25% ceiling to the right slice of your gain.10Internal Revenue Service. Instructions for Schedule D (Form 1040) (2025)
If you use the installment method, regulations require the unrecaptured Section 1250 gain to be recognized before any remaining capital gain.11eCFR. 26 CFR 1.453-12 – Allocation of Unrecaptured Section 1250 Gain Reported on the Installment Method The first payments carry the 25%-rate income; lower-taxed capital gain arrives in later installments. Spreading a large sale over years can still ease bracket pressure, but the tax treatment across payments will not be even.
Ways to Defer or Reduce the Tax
Section 1031 Like-Kind Exchange
A Section 1031 exchange lets you roll proceeds into a replacement property and defer all capital gains taxes, including the unrecaptured Section 1250 gain. Since the Tax Cuts and Jobs Act, only real property qualifies.12Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Two deadlines are rigid: identify potential replacement properties in writing within 45 days of the sale, and close on the replacement within 180 days.13IRS.gov. Like-Kind Exchanges Under IRC Section 1031 Miss either and the full gain is immediately taxable.
The gain is deferred, not forgiven. Your basis carries over into the replacement property, so the recapture follows you.
Stepped-Up Basis at Death
When an owner dies, the property passes to heirs at a basis stepped up to fair market value. No depreciation recapture is triggered on the transfer, even where accumulated depreciation is substantial.14Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets Serial 1031 exchanges combined with holding property until death can permanently erase unrecaptured Section 1250 gain for income tax purposes.
Releasing Suspended Passive Activity Losses
If passive activity rules suspended your rental losses during ownership, selling the entire property in a fully taxable transaction to an unrelated buyer releases all those losses at once.15IRS. 2025 Instructions for Form 8582 – Passive Activity Loss Limitations The freed-up losses offset gain from the sale, including the recapture. Long-time landlords with years of stacked-up losses can shrink the taxable gain sharply. The release requires a complete disposition; selling a partial interest does not qualify.
When a Former Home Is Involved
The Section 121 home sale exclusion ($250,000 single, $500,000 married filing jointly) does not shelter gain attributable to depreciation claimed after May 6, 1997.16Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence Two situations trip people up: home office depreciation, and renting out the property for a stretch before moving back in.
In either case, depreciation you took must be recognized as unrecaptured Section 1250 gain and taxed at the 25% ceiling, even when Section 121 wipes out the rest of the profit.17Internal Revenue Service. Publication 523 (2025), Selling Your Home If you claimed $30,000 of depreciation on a former rental and later sold with a $200,000 gain, you can exclude $170,000 and the $30,000 depreciation piece is taxed at up to 25%. Sellers who convert a rental back to a personal residence for the exclusion are often surprised by this carve-out.