The depreciation recapture tax rate depends on what you sold. Gains attributable to depreciation on business equipment, vehicles, and other tangible personal property are taxed as ordinary income at rates up to 37%. Gains attributable to depreciation on real property, like a rental building, are taxed at a maximum of 25%. In both cases, only the portion of your gain equal to the depreciation you previously claimed is subject to these rates. The rest of the gain is taxed at long-term capital gains rates of 0%, 15%, or 20%.
Equipment and Personal Property: Ordinary Rates Up to 37%
Section 1245 of the tax code covers business equipment, machinery, vehicles, and other tangible personal property. Every dollar of depreciation you previously deducted comes back as ordinary income when you sell at a gain, up to the amount of that gain. There is no preferential rate. The recaptured amount stacks on your other income and is taxed at whatever bracket it lands in.
For 2026, ordinary income rates run from 10% to 37%. A single filer reaches the 37% bracket at taxable income above $640,600; married couples filing jointly reach it at $768,700.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Selling a fully depreciated asset for a substantial gain can push a large slice of that recapture into the top bracket in a single year.
The logic is symmetry. You deducted depreciation against ordinary income while you owned the asset, so you pay ordinary rates when the deduction reverses on sale.2Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
Real Property: 25% Maximum
Real property is taxed differently. Straight-line depreciation on buildings and structural components falls into a category called “unrecaptured Section 1250 gain,” taxed at a maximum of 25% under Section 1(h) of the Internal Revenue Code.3Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed4Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty
The 25% figure is a ceiling. If your ordinary income bracket is lower than 25%, you pay recapture at that lower rate instead. Most investors selling appreciated rental property have enough income to trigger the full 25%. The rate applies only to the portion of your gain that equals the straight-line depreciation you claimed during ownership; everything above that shifts to capital gains rates.
How Much of Your Gain Gets Recaptured
Before applying any rate, you need to know how much of the sale is actually subject to recapture. The rule for both Section 1245 and Section 1250 property is the lesser of total depreciation claimed or total gain on the sale.
A Section 1245 example: you bought equipment for $100,000, claimed $60,000 in depreciation, and sell it for $85,000. Your gain is $45,000, and your total depreciation is $60,000. The lesser figure, $45,000, is taxed as ordinary income. If you instead sold that equipment for $110,000, the first $60,000 of the $70,000 gain would be Section 1245 ordinary income, and the remaining $10,000 would qualify for long-term capital gains rates as Section 1231 gain.
For real property, say you sell a rental building for a $500,000 total gain after claiming $200,000 in straight-line depreciation. That $200,000 is unrecaptured Section 1250 gain taxed at up to 25%. The remaining $300,000 is taxed at long-term capital gains rates.
These calculations are reported on IRS Form 4797, which separates recapture from other gain and allocates the sale price between depreciable property and non-depreciable property like land based on fair market value.5Internal Revenue Service. Instructions for Form 4797 (2025)
Rates on the Rest of the Gain
Whatever gain remains after the recapture carve-out is taxed at long-term capital gains rates: 0%, 15%, or 20%, depending on your taxable income.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, single filers pay 0% up to $49,450 in taxable income and 15% up to $545,500, with 20% applying above that. Married couples filing jointly hit 15% at $98,900 and 20% at $613,700. Most sellers of investment property land in the 15% bracket on their non-recapture gain.
The 3.8% Net Investment Income Tax
Higher-income taxpayers face an additional 3.8% Net Investment Income Tax on top of the recapture and capital gains rates. It applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds a threshold: $250,000 for married filing jointly, $200,000 for single filers, and $125,000 for married filing separately.7Internal Revenue Service. Net Investment Income Tax These thresholds are not indexed for inflation and have not changed since the tax took effect in 2013.
For rental property, the NIIT generally applies to the full gain, including both the 25% recapture portion and any remaining long-term capital gain. Rental activity is almost always treated as passive regardless of your involvement, so a large rental sale can easily trigger the full 3.8% on top of the recapture rate. That pushes the effective federal rate on the depreciation portion of a rental sale to 28.8%.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax Gain on business property where you actively participate may be excluded from net investment income.
State Income Tax
Federal rates are only part of the picture. Most states tax capital gains and recaptured depreciation as ordinary income, adding roughly 3% to over 13% depending on where you live. A handful of states impose no income tax on these gains. Because most states do not distinguish between recapture and regular capital gains, the state rate applies uniformly to the entire gain.
Combining federal recapture, the potential 3.8% NIIT, and state tax, the effective rate on recaptured depreciation can approach 50% in high-tax states. Running the combined figure before you list is the only way to avoid a surprise at closing.
Situations That Change the Answer
Home Office Depreciation
The Section 121 home sale exclusion (up to $250,000 for single filers and $500,000 for married couples) does not cover the portion of gain equal to depreciation claimed after May 6, 1997.9Internal Revenue Service. Sales, Trades, Exchanges 3 If you deducted $15,000 in home office depreciation, that $15,000 is taxed as unrecaptured Section 1250 gain at up to 25% when you sell, no matter how much total gain the exclusion otherwise shields.
Installment Sales Don’t Spread Recapture
Structuring a sale as an installment sale spreads the capital gain portion over the years you receive payments, but Section 453(i) requires all depreciation recapture to be recognized in the year of sale, even if you haven’t received the money yet.10Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method You close in December, wait years for most of the cash, and still owe the full recapture tax by the following April. Form 6252 has a specific line for recapture that is fully taxable in the year of sale regardless of payments received.11Internal Revenue Service. Form 6252 Installment Sale Income
1031 Exchanges Defer, Not Erase
A like-kind exchange under Section 1031 defers the entire gain, including recapture, by rolling it into a reduced basis in the replacement property. The tax reappears when you eventually sell without exchanging again.12Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 Since 2018, Section 1031 has been limited to real property, so Section 1245 recapture on equipment cannot be deferred this way.13Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Any cash or non-like-kind property received in an exchange (known as boot) is allocated first to depreciation recapture, so even a partial cash-out can trigger the recapture rate on the first dollars received.
Step-Up at Death
Property inherited from a decedent receives a basis equal to its fair market value at the date of death under Section 1014.14Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Accumulated depreciation that would have been recaptured in a lifetime sale effectively disappears. Buy a rental for $400,000, take $150,000 in depreciation, die when it’s worth $700,000, and heirs who sell for $700,000 owe no recapture and no gain.