Depreciation recapture on rental property: the 25% rate

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: When you sell a rental, the depreciation you took (or could have taken) comes back as taxable gain. Building depreciation is unrecaptured section 1250 gain taxed at up to 25%; personal property and cost seg components are section 1245 recapture taxed as ordinary income. A 1031 exchange, installment sale or holding until death can defer or eliminate it.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Depreciation is the landlord's favorite deduction because it costs nothing in cash. Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). Then you sell, and the IRS sends an invoice titled "about that roof." That invoice is depreciation recapture. It's not a penalty; it's the tax code reversing a deduction that, it turns out, the property didn't really lose in value.

Related: the full sale picture is in selling a rental property, and the depreciation basics are in the real estate depreciation guide.

CPA Warning Label: Skipping depreciation doesn't skip recapture. The IRS reduces basis by what you could have claimed, so you pay tax on deductions you never took.

What gets recaptured

Every dollar of depreciation reduces your adjusted basis. Lower basis means higher gain on sale. Recapture rules then decide what rate applies to the part of the gain caused by depreciation.

Gain above total depreciation is section 1231 gain, usually long-term capital gain at 0%, 15% or 20%. The 3.8% net investment income tax can apply to the whole gain if your MAGI exceeds $200,000 single or $250,000 joint, unless the rental is a non-passive trade or business for you.

Land improvements are where Form 4797 gets fiddly. Have the computation reviewed if you took bonus on them.

25% max rate

Unrecaptured section 1250 gain is the most common recapture for landlords. It's taxed at your regular ordinary rate, but not more than 25%. If you're in the 12% bracket, it's taxed at 12%; if you're in the 35% bracket, it's capped at 25%.

Losses from other section 1231 transactions in the same year and capital losses can reduce it. Section 1231 losses in the prior five years can also recharacterize current 1231 gain as ordinary (the lookback rule in 1231(c)), so a sale after a prior-year loss can be costlier than expected.

Allowed or allowable rule

Section 1016(a)(2) reduces basis by depreciation "allowed or allowable," meaning the greater of what you deducted or what you were entitled to deduct (but not less than the allowable amount). If you forgot to claim depreciation, your basis drops anyway, and recapture applies to depreciation you never got a deduction for. The worst of both worlds.

The fix: if you have unclaimed depreciation, you can usually catch it up without amending prior returns by filing Form 3115 (change in accounting method) with a section 481(a) adjustment, deducting the missed amount in the year of change. See catch-up depreciation with Form 3115. Do it before the year of sale, ideally, or in the year of sale. Generally, you need to have used an impermissible method for two or more consecutive years for the automatic change to apply; if you missed only one year, an amended return is usually the route.

Example sale

Illustration (made-up numbers): Frugal Fran bought a rental in 2016 for $300,000 ($60,000 land, $240,000 building). She also bought $10,000 of appliances in 2020. She sells in 2026 for $500,000 with $30,000 of selling costs.

Character, assuming the appliances sell for $1,000 as part of the deal: $1,000 of section 1245 ordinary recapture (gain on appliances is limited to their sale value). The building's $87,270 of depreciation is unrecaptured 1250 gain, at up to 25%. The rest, about $169,000, is long-term capital gain. If Fran is in the 24% bracket with gains pushing her into the 15% capital gains rate, the federal tax is roughly $240 + $20,945 + $25,350 = about $46,500, plus NIIT if her MAGI exceeds the threshold, plus state tax.

Compare the gain if she'd never depreciated: $470,000 − $310,000 = $160,000. The extra $97,270 of gain is the recapture, and the tax on it (about $21,000) is less than the tax she saved over 10 years at 24% (about $23,000), and she had that money years earlier. That's why depreciation is still worth taking. Model your numbers with the depreciation recapture calculator.

Recapture after a cost segregation study

A cost segregation study moves basis from the 27.5- or 39-year building into 5-, 7- and 15-year property, and with 100% bonus depreciation on property acquired after January 19, 2025, much of it gets deducted in year one. On sale, that personal property is section 1245 property: gain up to the depreciation taken is ordinary income, potentially at 32%, 35% or 37%, not capped at 25%.

The saving grace is allocation. The sale price has to be allocated among land, building and personal property by relative fair market value at sale. A seven-year-old carpet and a tired sofa set are not worth much, so the gain allocated to 1245 property is often far less than the depreciation taken. That allocation should be supported, ideally in the purchase agreement or by an appraisal, not chosen after the fact to minimize tax.

Quick illustration: Lavish Larry took $120,000 of bonus on cost seg components. At sale five years later, an appraisal values those components at $25,000. The 1245 recapture is limited to $25,000 of ordinary income (gain allocated to those components). The other $95,000 of depreciation matched value the components genuinely lost, so it isn't recaptured at all. That outcome depends on honest, documented values; an allocation that assigns almost nothing to a recently renovated kitchen package invites a challenge, and the IRS can reallocate based on appraisals.

Partial dispositions reduce future recapture

When you replace a roof or HVAC system, the regulations let you make a partial disposition election to write off the remaining basis of the old component. That gives you a deduction now and removes that old component's depreciation from future recapture calculations' basis tracking, since it's gone. It's a small but real benefit for long-time owners.

Ways to defer

• 1031 exchange: recapture rolls into the replacement property. Section 1250 recapture can be triggered in an exchange if the replacement isn't 1250 property of at least equal amount, which is rarely an issue for real-estate-to-real-estate swaps. 1245 personal property is not like-kind and is taxed as boot.
• Hold until death: under section 1014, heirs generally get a basis step-up to fair market value, and the recapture disappears. Current law as of Oct 2026.
• Installment sale: ordinary 1245 and 1250 recapture is taxed in the year of sale regardless of payments; unrecaptured 1250 gain (the 25% piece) can be spread, but it's reported first as payments arrive.
• Charitable remainder trust or gifts to charity: different trade-offs; a gift of appreciated rental property to charity limits the deduction to basis for ordinary-income portions.
• Opportunity zones: investing capital gain in a qualified opportunity fund can defer gain under rules revised by 2025 legislation; check current rules before planning. See opportunity zone real estate.
• Suspended passive losses released on a full taxable sale offset recapture income too, which softens the bill.

Converting a home to a rental, and back

If you claimed depreciation on a home office or a rental period, that depreciation after May 6, 1997 is never excluded under the home sale exclusion. It's taxed as unrecaptured 1250 gain even if the rest of the gain is excluded. See moving into your rental.