Depreciation Recapture on a Rental Property: How Much Tax You’ll Owe When You Sell
Short answer: When you sell a rental for a gain, the portion of the gain equal to the depreciation you took is taxed as “unrecaptured Section 1250 gain” at your ordinary income rate, capped at 25%. The rest of the gain is taxed at long-term capital gains rates (0%, 15% or 20%), and higher earners may also owe the 3.8% net investment income tax.
- Depreciation lowers your basis, which increases your taxable gain when you sell.
- The depreciation portion of the gain is taxed at up to 25% federally.
- Recapture applies to depreciation allowed or allowable, even if you never claimed it.
- A 1031 exchange can defer recapture along with capital gains tax.
Why recapture exists
Each year you own a rental, depreciation lets you deduct part of the building’s cost against your rental income. Those deductions also lower your cost basis. When you sell, a lower basis means a bigger gain, and the IRS taxes the part of the gain that came from depreciation at a higher rate than ordinary long-term gains.
Step 1: Find your adjusted basis
Adjusted basis = purchase price + purchase closing costs + capital improvements − depreciation taken (or allowable)
Step 2: Find your total gain
Total gain = sale price − selling costs − adjusted basis
Selling costs include agent commissions, transfer taxes, title and escrow fees and other closing costs you pay as the seller.
Step 3: Split the gain into two parts
- Unrecaptured Section 1250 gain: the lesser of your total gain or the depreciation you took. Taxed at your ordinary income rate, but no more than 25%.
- The remaining gain: taxed at the long-term capital gains rate (0%, 15% or 20%, depending on your taxable income) if you held the property for more than a year.
On top of that, if your modified adjusted gross income (including the gain) is above $200,000 (single) or $250,000 (married filing jointly), you may owe the 3.8% net investment income tax on some or all of the gain. Most states tax the gain as ordinary income too.
Worked example
You bought a rental for $300,000, paid $5,000 in closing costs and spent $15,000 on a new roof. Over eight years you took $80,000 of depreciation. You sell for $450,000 and pay 7% in selling costs. You file single, have $250,000 of other income (so your ordinary rate is above 25%) and live in a state with no income tax.
| Item | Amount |
|---|---|
| Purchase price + closing costs + roof | $320,000 |
| Less depreciation taken | −$80,000 |
| Adjusted basis | $240,000 |
| Sale price | $450,000 |
| Less selling costs (7%) | −$31,500 |
| Total gain ($418,500 − $240,000) | $178,500 |
| Unrecaptured §1250 gain | $80,000 |
| Remaining long-term gain | $98,500 |
| Federal tax | Amount |
|---|---|
| Recapture: $80,000 × 25% | $20,000 |
| Long-term gain: $98,500 × 15% | $14,775 |
| Net investment income tax: $178,500 × 3.8% | $6,783 |
| Total federal tax | $41,558 |
Without the depreciation, the gain would have been $98,500, but you would also have paid more tax on your rental income over those eight years. Recapture is the trade-off for that earlier benefit.
Is recapture always 25%?
No. 25% is the maximum. Unrecaptured Section 1250 gain is taxed at your ordinary rate if that is lower. A seller whose income keeps them in the 22% or 24% bracket pays 22% or 24% on that portion. Because the gain itself is added to your income, it can push part of it into a higher bracket, so it is worth running the numbers or asking a tax professional before you sell.
Ways to reduce or defer recapture
- 1031 exchange: reinvest in like-kind property to defer both recapture and capital gains tax.
- Hold until death: heirs generally receive a stepped-up basis, which can eliminate the deferred gain.
- Time the sale: selling in a lower-income year can reduce the rate on the recapture portion.
- Offset with losses: capital losses and suspended passive losses released on the sale can reduce the overall tax.
Frequently asked questions
What is unrecaptured Section 1250 gain?
It is the part of the gain on selling depreciable real estate that equals the straight-line depreciation you took. It is taxed at your ordinary income rate, up to a maximum of 25%.
Do I owe recapture if I never claimed depreciation?
Generally yes. Recapture is based on depreciation allowed or allowable, so you can owe it even on depreciation you didn’t deduct. That is why it usually makes sense to claim it every year.
Does depreciation recapture apply if I sell at a loss?
No. If the sale price after selling costs is below your adjusted basis, there is no gain and nothing to recapture.
Can a 1031 exchange avoid depreciation recapture?
A 1031 exchange defers recapture and capital gains tax by carrying your basis into the replacement property. The deferred gain is taxed when you eventually sell in a taxable sale, unless you exchange again or the property passes to heirs.
More guides
This guide explains general federal tax rules for educational purposes and is not tax, legal or financial advice. Rules change and depend on your situation. Consult a qualified tax professional before acting.