What Is Recaptured Depreciation? Rates, Real Estate, and Reporting

Recaptured depreciation is the part of your profit on the sale of a business or investment asset that the IRS taxes at higher rates because you already deducted that amount as depreciation in earlier years. For equipment and other personal property, the recaptured portion is taxed as ordinary income at rates up to 37%. For real estate, it is capped at a 25% rate on the depreciation portion of the gain. Any gain above what you previously depreciated is treated as a regular capital gain.

Why Depreciation Comes Back at Sale

Each year you claim depreciation, two things happen. You reduce your taxable income now, and you reduce the asset’s adjusted basis, which is the original purchase price minus all depreciation taken. When you sell, your gain is measured from that lower basis, not from what you originally paid. So the deductions you enjoyed along the way translate directly into a larger reported gain at the end.

The IRS treats those earlier deductions as a timing benefit rather than a permanent one. Recapture is how it collects that benefit back. The amount subject to recapture is capped at the lesser of the total depreciation you claimed or the total gain on the sale. Anything above your total depreciation is regular capital gain.

Two Code sections do the work. Section 1245 governs equipment and other personal property. Section 1250 governs real estate. The rates and mechanics differ sharply between them.

Equipment and Personal Property: Full Ordinary Income Recapture

Section 1245 covers tangible personal property used in a business, including vehicles, computers, machinery, and office furniture.¹ It also reaches amortizable Section 197 intangibles such as goodwill, patents, and customer lists.²

The rule is blunt. Every dollar of depreciation you previously deducted is taxed as ordinary income when you sell at a gain, up to the total gain realized. Only gain exceeding the total depreciation you took qualifies for long-term capital gains rates. Bonus depreciation and Section 179 expensing are treated the same as regular depreciation for this purpose.¹

Take a machine bought for $100,000 with $60,000 of depreciation claimed, leaving an adjusted basis of $40,000:

Sold for $70,000. The gain is $30,000. All $30,000 is ordinary income because it sits within the $60,000 of depreciation taken.
Sold for $110,000. The gain is $70,000. The first $60,000 is ordinary income. The remaining $10,000 is a Section 1231 gain eligible for long-term capital gains rates.

The gap between the two rates is wide. Ordinary income rates for 2026 top out at 37%, while long-term capital gains rates top out at 20% for most taxpayers.³

Real Estate: A 25% Cap on the Depreciation Portion

Section 1250 covers real property used in a business or held for investment, including residential rentals, commercial buildings, and structural improvements. Since 1987, real property has had to use straight-line depreciation, and that history is what drives the more favorable treatment.

When you sell real estate at a gain, the depreciation portion is taxed at a maximum rate of 25% rather than at ordinary income rates.⁴ The IRS calls this “unrecaptured Section 1250 gain.” It sits between the regular long-term capital gains rates of 0%, 15%, or 20% and the full ordinary income rates that apply under Section 1245.⁵

Say you bought a rental building for $500,000 (excluding land), claimed $100,000 of depreciation, and sold for $550,000. The adjusted basis is $400,000, and the gain is $150,000:

The first $100,000 is unrecaptured Section 1250 gain, taxed at a maximum of 25%.
The remaining $50,000 is a standard long-term capital gain, taxed at 0%, 15%, or 20% based on your income.

The 25% figure is a ceiling, not a flat rate. A seller in a lower bracket may pay less. For higher-income sellers who would otherwise face 32% or 37%, the cap is where the real benefit shows up.

The 3.8% Net Investment Income Tax

Higher-income sellers face an added layer. The 3.8% Net Investment Income Tax applies to gains from investment real estate when modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married joint filers, or $125,000 for married filing separately.⁶ Those thresholds are not indexed for inflation.

The NIIT stacks on top of the applicable capital gains or recapture rate. An investor over the threshold could pay 25% on the unrecaptured Section 1250 gain plus 3.8% NIIT, an effective 28.8% on the depreciation portion. Gain above the depreciation could reach a combined 23.8%.⁷

Home Office Depreciation Survives the Section 121 Exclusion

This one surprises homeowners. If you claimed depreciation on a home office and later sell the house, the Section 121 exclusion that shelters up to $250,000 (single) or $500,000 (joint) of gain on a primary residence does not cover the depreciation portion. Any depreciation you claimed after May 6, 1997 must be recaptured, even if the rest of the gain is fully excluded.⁸

The recaptured amount is unrecaptured Section 1250 gain at the 25% maximum rate. And it gets worse: even depreciation you were entitled to claim but didn’t actually deduct still counts against you, because the IRS uses the “allowed or allowable” standard.⁸

Recapture Without a Sale

You don’t always need to sell to trigger recapture. For “listed property” under Section 280F, a category that includes vehicles and other transportation equipment, recapture kicks in if qualified business use drops to 50% or below after the year you placed the asset in service.⁹

When that happens, you must include the “excess depreciation” in gross income for that year. Excess depreciation is the difference between what you actually claimed, including any bonus or Section 179 amounts, and what the slower Alternative Depreciation System would have allowed. From that point forward, remaining depreciation on the asset must use the Alternative Depreciation System.⁹ The rule bites hardest on vehicles where a large first-year deduction was followed by a drop in business use, and it’s easy to miss because no sale occurred.

Other Events That Trigger, Defer, or Erase Recapture

Installment Sales

Selling on an installment plan does not let you spread the recapture over the payment years. The IRS requires you to recognize the full recapture amount as ordinary income in the year of sale, even before most of the cash arrives.¹⁰ Only gain above the recapture amount is eligible for installment reporting.¹¹ Plan for the liquidity gap before you sign.

Like-Kind Exchanges

A Section 1031 exchange defers gain, including recapture, when you swap one piece of real property for another of like kind.¹² Depreciation history carries over to the replacement property, so recapture is postponed, not eliminated. Since 2018, Section 1031 applies only to real property; equipment, vehicles, and intangibles no longer qualify.¹³ If you receive boot (cash, debt relief, or non-like-kind property), gain is recognized up to the boot amount and treated as ordinary income to the extent of the potential recapture.¹⁴

Gifts and Charitable Contributions

Giving away a depreciable asset does not trigger recapture at the time of the gift. The recipient inherits your adjusted basis and your depreciation history, so the potential recapture liability travels with the asset. A bargain sale (part gift, part sale) triggers recapture on the sale portion.

Donating depreciable property to charity likewise avoids a recapture tax bill, but it shrinks the deduction. When contributed property would generate ordinary income if sold because of recapture, the charitable deduction is generally limited to your adjusted basis, not fair market value.¹⁵

Involuntary Conversions

If property is condemned or destroyed in a casualty, the resulting gain can include a recapture component. Reinvesting the insurance proceeds or condemnation award into qualified replacement property within the required timeframe defers that gain, recapture portion included.

Inheritance

Death is the one event that eliminates recapture rather than deferring it. Under Section 1014, an heir receives a stepped-up basis equal to fair market value on the date of death, and all depreciation the decedent claimed during their lifetime is wiped out for recapture purposes.¹⁶ If the heir depreciates the property and later sells, only their own depreciation is subject to recapture. Combined with lifetime 1031 exchanges, this is how long-term real estate holders defer recapture for decades and then erase it at death.

Land Versus Building Allocation Changes the Bill

When you sell real estate, the sale price must be split between the non-depreciable land and the depreciable building. Only the building portion carries recapture potential, because land cannot be depreciated.¹⁷

A larger land allocation shrinks the building gain and the recapture with it. A larger building allocation increases the amount taxed at 25%. Buyers and sellers usually pull in different directions here, since a buyer benefits from a higher building allocation through future depreciation deductions. When an entire business changes hands, both parties file Form 8594, which requires an agreed allocation across asset classes.¹⁸ Aggressive allocations invite scrutiny; an independent appraisal is the strongest defense.

How to Report Recapture on Your Return

Reporting starts on Form 4797 for both Section 1245 and Section 1250 property.

Form 4797, Part III calculates the recapture. You enter original cost, accumulated depreciation, and sale price, and the form determines how much of the gain is ordinary income.¹⁴
Form 4797, Part II carries the ordinary income recapture from Part III through to your Form 1040.
For real estate, the depreciation portion (unrecaptured Section 1250 gain) is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions, entered on Schedule D, line 19, and then run through the Schedule D Tax Worksheet, where the 25% cap is applied.¹⁹

Installment sales use Form 6252 for the installment reporting, but the full recapture still appears on Form 4797 in the year of sale.¹⁰ Taxpayers over the NIIT thresholds also file Form 8960 to figure the 3.8% surtax.⁶

1
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
2
eCFR. 26 CFR 1.197-2 – Treatment of Amortizable Section 197 Intangibles
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
5
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
6
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
7
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
8
Internal Revenue Service. Publication 523 – Selling Your Home
9
Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles
10
Internal Revenue Service. Publication 537 – Installment Sales
11
GovInfo. 26 USC 453 – Installment Method
12
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
13
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
14
Internal Revenue Service. Instructions for Form 4797
15
Internal Revenue Service. Publication 526 – Charitable Contributions
16
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
17
Internal Revenue Service. Publication 946 – How To Depreciate Property
18
Internal Revenue Service. Instructions for Form 8594
19
Internal Revenue Service. Instructions for Schedule D (Form 1040)