Depreciation Recapture: Calculator, 1245 vs 1250, and the Tax

How it works, in plain English

Every year you own a rental, a commercial building or business equipment, depreciation lowers your taxable income. It also lowers your basis, dollar for dollar (IRC 1016(a)(2)). When you sell, the lower basis means a bigger gain, and the tax code taxes the slice of the gain that came from depreciation at its own rates. That slice is depreciation recapture.

A sale gain splits into up to three layers:

1. Section 1245 recapture. Depreciation on personal property (equipment, vehicles, furniture, and the 5-, 7- and 15-year components a cost segregation study pulls out of a building) comes back as ordinary income, up to the gain on that property (IRC 1245(a)). Top federal rate 37%.
2. Unrecaptured Section 1250 gain. Straight-line depreciation on a building is not ordinary income for an individual. It is capital gain taxed at a maximum 25% (IRC 1(h)(1)(E) and 1(h)(6)). The part that fits in the 10% to 24% ordinary brackets is taxed at those lower rates.
3. Remaining gain. Appreciation above your original cost is long-term capital gain (or Section 1231 gain) at 0%, 15% or 20%.

On top of all three, the 3.8% net investment income tax applies to a passive or investment seller once income is over $250,000 (married) or $200,000 (single). See net investment income tax on a sale.

The calculator on this page takes price, adjusted basis, depreciation split between Section 1245 property and real property, your state, filing status and other income, and returns the tax on each layer from the same engine used across the site. To see the same sale paid over time, run your numbers on the seller financing calculator.

Section 1245 vs Section 1250 vs unrecaptured Section 1250

Because buildings placed in service after 1986 must use straight-line under MACRS, true Section 1250 recapture is rare for individuals today. It shows up when bonus depreciation was claimed on Section 1250 property such as qualified improvement property: the bonus is accelerated depreciation, so the excess over straight-line is additional depreciation recaptured as ordinary income. For most building sellers, the 1250 number on the return is unrecaptured Section 1250 gain, not ordinary income.

C corporations are different. Corporations have no 25% rate, and IRC 291(a)(1) treats 20% of the amount that would have been Section 1245 recapture (if the building were 1245 property) over the actual Section 1250 recapture as ordinary income. For a straight-line building, that is 20% of the depreciation taken.

Section 1231 lookback. If you deducted net Section 1231 losses in any of the prior five years, an equal amount of this year's net Section 1231 gain is taxed as ordinary income (IRC 1231(c)). Ask your CPA for the last five Forms 4797.

Allowed or allowable: you pay recapture even on depreciation you skipped

Basis drops by the greater of the depreciation you actually deducted or the depreciation you were entitled to deduct (IRC 1016(a)(2)), and the recapture rules measure the same way. A landlord who never claimed depreciation on a rental still has a lower basis and still owes tax on that gain at sale. The fix, while you still own the property, is usually an accounting method change on Form 3115 that catches up the missed deductions in one year. Talk to your CPA before the sale, not after.

Cost segregation and bonus depreciation

A cost segregation study reclassifies parts of a building (carpet, cabinetry, dedicated electrical, parking lots, landscaping) into 5-, 7- and 15-year property. With bonus depreciation, restored to 100% permanently for property acquired after January 19, 2025 by the One Big Beautiful Bill Act (IRC 168(k)), those components can be written off in year one. The trade comes at sale: their depreciation is Section 1245 recapture at ordinary rates, not unrecaptured 1250 gain at a 25% cap. Whether that paid off depends on your bracket then versus at sale, and the years you had use of the money. See cost segregation before a sale.

The purchase price allocation also matters: recapture on each component is limited to the gain on that component, so the value assigned to fixtures and equipment in the contract moves the number.

Worked example (engine-computed)

Assumptions (labeled, not a quote): married filing jointly, 2026 tax tables, $150,000 of other ordinary income, Texas residents (no state income tax) and then California residents. They sell a commercial rental for $3,000,000 cash. Adjusted basis is $1,200,000 after $800,000 of depreciation: $250,000 on cost segregation components (Section 1245) and $550,000 straight-line on the building. The components sell for at least their depreciated value plus the recapture. No selling costs, no prior Section 1231 losses, passive investors so the NIIT applies. Gain: $1,800,000 = $250,000 Section 1245 recapture + $550,000 unrecaptured Section 1250 gain + $1,000,000 remaining gain.

The Section 1245 layer landed mostly in the 22% and 24% brackets because only $150,000 of other income sat beneath it; a higher-income seller would pay 32% to 37% on more of it.

Same building, no cost segregation. If all $800,000 had been straight-line building depreciation, the engine shows a Texas total of $477,753, about $5,610 less at sale, all of it from a smaller AMT in this case. That is the price of having taken $250,000 of deductions years earlier. California tax is the same in both versions because California taxes the whole gain as ordinary income.

Exceptions and ways to defer recapture

• Your home. The Section 121 exclusion ($250,000 single, $500,000 married) does not cover gain equal to depreciation taken after May 6, 1997, such as for a home office or a period as a rental (IRC 121(d)(6)). That piece is taxed as unrecaptured Section 1250 gain even if the rest is excluded.
• 1031 exchange. A qualifying exchange defers recapture along with the rest of the gain and carries the lower basis into the replacement property. Watch the components: Section 1245(b)(4) and 1250(d)(4) can trigger recapture inside an otherwise valid exchange, for example a cost-segregated building traded for raw land. See 1031 exchange and 1031 boot.
• Installment sale. Section 453(i) taxes all Section 1245 and 1250 ordinary recapture in the year of sale even if no cash arrives, but unrecaptured Section 1250 gain and the remaining gain spread with the payments. See depreciation recapture on an installment sale and the basics of installment sale tax and seller financing taxes.
• Hold until death. Heirs get a basis step-up under Section 1014, which wipes out recapture on property held at death. See holding for the step-up.

Where it goes on the forms

Form 4797 does the work. Part III computes Section 1245 and Section 1250 recapture asset by asset (line 25 for 1245 property, line 26 for 1250 property). Ordinary recapture flows to Part II; remaining Section 1231 gain flows through Part I to Schedule D. Unrecaptured Section 1250 gain is figured on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions and feeds the 25% computation. On an installment sale, Form 6252 picks up the recapture from Form 4797 in the year of sale and reports only the remaining gain as payments come in.

IRS stance and audit risk

Recapture is a mandatory rule, and the IRS checks it. Common exam issues: depreciation that was allowable but never claimed (still reduces basis), allocations that push too much price to land or goodwill and too little to depreciated components, missing Section 1231 lookback, and home-sale returns that exclude gain from post-May 6, 1997 depreciation.

Costs and fees

Recapture has no fee, only tax. The costs are a CPA to rebuild incomplete depreciation records, possibly a Form 3115, and an appraisal or cost segregation report to support the allocation. The $5,000 Big Sale Tax Analysis is a flat fee. Get the full Big Sale Tax Analysis to see recapture modeled across a cash sale, an installment sale, a 1031 and the other paths.

How it compares with a Section 453 installment sale

An installment sale does not reduce recapture; it changes when the tax is paid. Ordinary Section 1245 recapture is due in year one, so the down payment should cover it. Unrecaptured Section 1250 gain and the remaining gain are reported as payments arrive, and Treas. Reg. 1.453-12 says the 25% gain comes out first. Spreading the remaining gain over several years can keep more of it in the 15% bracket and keep income under the NIIT threshold in some years. Sellers who carry a note also take on buyer credit risk, which they manage with a solid down payment, a first-position deed of trust and strong note terms.

Get the full Big Sale Tax Analysis

Frequently asked questions