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Depreciation Recapture: Tax Rates, Rules and How to Calculate It

By Hans Goldstein · Updated 2026-09-27

Depreciation recapture is the tax on the part of your gain that came from depreciation. When you sell a rental or business asset for more than its depreciated basis, the IRS taxes the depreciation slice at higher rates than ordinary long-term gain: up to 25% for straight-line depreciation on a building, and ordinary rates (up to 37%) for equipment, cost-segregated components and bonus depreciation. The rest of the gain gets the normal 0%, 15% or 20% capital gain rates.

This guide explains what recapture is, how each rate applies, how to calculate it step by step, and what does and does not change it. Every example is a labeled simple example computed on 2026 federal figures.

What is depreciation recapture?

Depreciation lets you deduct the cost of a building or equipment over its recovery period: 27.5 years for residential rental buildings, 39 years for commercial buildings, 5, 7 or 15 years for equipment and land improvements. Each deduction lowers your ordinary income while you own the property. It also lowers your basis.

When you sell, gain is measured from that lower basis. So part of your gain exists only because you took depreciation. The tax code does not let that slice ride at the low capital gain rate. It "recaptures" it at a higher rate, because the deductions saved you tax at higher rates on the way in.

Three things to know up front:

• Recapture is not a separate tax. It is a label on part of your gain that sets its rate.
• It applies to depreciation "allowed or allowable." Form 4797 asks for depreciation "allowed or allowable," so depreciation you could have taken but did not still reduces basis and still counts.
• It never exceeds your gain. The recapture layer is the smaller of total depreciation or total gain. If you sell at a loss, there is nothing to recapture.

The three layers of gain on a sale

Every dollar of gain on a depreciated property falls into one of three layers.

On top of all three, the 3.8% net investment income tax can apply if the property was a passive investment and your modified AGI is over $250,000 (married filing jointly) under §1411. That threshold is set in the statute and is not indexed for inflation.

Section 1250 "additional depreciation" is rare for buildings. Section 1250 recapture at ordinary rates applies only to depreciation above straight-line, including bonus depreciation. The common modern case is bonus or accelerated depreciation on 15-year land improvements (paving, landscaping, fencing) from a cost segregation study: that excess is ordinary income under §1250, taxed in the year of sale like §1245 recapture. The Form 4797 instructions confirm that residential rental property (27.5-year) and nonresidential real property (39-year) placed in service after 1986 under MACRS do not require the additional depreciation calculation. For almost every modern rental building, the building's depreciation is the up-to-25% layer, not ordinary recapture. The details are in our guide to unrecaptured Section 1250 gain.

Depreciation recapture tax rates in 2026

Here is how the rates stack for a married couple filing jointly in 2026, using Rev. Proc. 2025-32:

Two points often get missed:

25% is a ceiling, not a flat rate. When taxable income is modest, part of the Section 1250 layer is taxed at 10%, 12% or 22% instead, and the whole calculation can never produce more tax than taxing everything at ordinary rates (§1(h)(1)). Under the Schedule D Tax Worksheet, unrecaptured §1250 gain is taxed at ordinary rates to the extent your ordinary income plus that gain stays within the 24% bracket ($403,550 of taxable income, MFJ 2026). Only the part above that line is taxed at 25%.

Ordinary recapture is not always worse than the 25% layer. A couple whose income stays within the 24% bracket pays the same ordinary rate on a dollar of §1245 recapture as on a dollar of unrecaptured §1250 gain, as the example below shows. The trouble with §1245 recapture is usually timing and size: it is taxed in the year of sale even on an installment sale, and a big cost-segregation study can push you into the 32%, 35% or 37% brackets.

California taxes all of it as ordinary income. California has no lower capital gain rate (FTB), so recapture and appreciation are taxed the same way at state level, up to 13.3% including the 1% surcharge on taxable income over $1 million (R&TC §17043). Because California does not follow federal bonus depreciation (R&TC §17250(a)(11)), your California basis and gain can differ from federal.

How to calculate depreciation recapture, step by step

1. Find your adjusted basis. Original cost, plus improvements, minus all depreciation allowed or allowable (including bonus and Section 179).
2. Figure total gain. Sale price minus selling expenses minus adjusted basis.
3. Split the depreciation. Separate depreciation on §1245 property (cost-seg 5- and 7-year components, equipment, §179), and any bonus or accelerated depreciation on 15-year land improvements (§1250 property, ordinary recapture under §1250(a)), from straight-line depreciation on the building.
4. Section 1245 recapture. For each §1245 asset, the smaller of its depreciation or its gain. Ordinary income.
5. Unrecaptured Section 1250 gain. The smaller of the building's depreciation or the building's gain, minus any §1250 ordinary recapture (usually zero). Taxed at up to 25%.
6. Remaining gain. Everything else is Section 1231 gain that, after netting, is generally taxed as long-term capital gain.
7. Check the lookback. Net §1231 losses deducted in the prior five years turn the same amount of this year's net §1231 gain into ordinary income (§1231(c)). Form 4797, line 8 handles it.

Land never produces recapture because land is not depreciated. If you sell land and building together, the price is allocated between them by fair market value, and the building's gain is figured separately. The Form 4797 instructions require it: the building goes in Part III and the land in Part I. The Form 4797 guide walks through each line.

A worked example: selling a rental

Simple example. A married couple bought a rental for $500,000 ($100,000 land, $400,000 building). Over the years they took $150,000 of straight-line depreciation on the building. In 2026 they sell for $800,000 and pay $40,000 in selling costs. Their other taxable income is $100,000. The rental was a passive investment.

Step 1: adjusted basis. $500,000 - $150,000 = $350,000.

Step 2: total gain. $800,000 - $40,000 - $350,000 = $410,000.

Step 3: layers.

Step 4: federal tax on the sale. On the Schedule D Tax Worksheet, the $150,000 layer stacks on the $100,000 of other taxable income and stays below the top of the 24% bracket, so it is taxed at ordinary rates, not 25%: $800 at 12%, $110,600 at 22% and $38,600 at 24%, or $33,692. The $260,000 of remaining gain falls in the 15% band: $39,000. Federal income tax on the sale is $72,692.

Step 5: net investment income tax. Their modified AGI is roughly $542,200 (taxable income of $510,000 plus the $32,200 standard deduction, assuming no other adjustments). The excess over $250,000 is $292,200, which is less than the $410,000 gain, so NIIT is 3.8% x $292,200 = $11,103.60.

All in, about $83,800 of federal tax. The depreciation layer is taxed at 22% and 24% here, above the 15% on the rest of the gain, which is the whole cost of recapture for this couple.

Same sale, with a cost segregation study

Simple example, continued. Suppose instead that $60,000 of the $150,000 was bonus depreciation on 5- and 7-year components from a cost segregation study, and those components carry at least $60,000 of gain at sale. Now the layers are $60,000 of §1245 ordinary recapture, $90,000 of unrecaptured §1250 gain, and $260,000 of capital gain.

For this couple the federal tax on the sale does not change: it is $72,692 either way, because the $60,000 is taxed at the same 22% and 24% ordinary rates the §1250 layer was already paying. Change one fact: if their other taxable income were $600,000 instead, the same shift raises federal tax on the sale from $88,816 to $95,500, mainly because the $60,000 moves from the 25% maximum to the 35% bracket.

The lesson: cost segregation before selling is a bracket question, not a yes-or-no question. The bigger issue is timing, covered below.

Depreciation recapture on rental property: the special rules

Rentals have a few rules that change the math.

Passive losses can absorb it. For an owner who is not a real estate professional, all gain on a rental, including recapture, is passive activity income (Temp. Reg. §1.469-2T(c)(2)(i)(A)). A full taxable sale also frees the property's suspended passive losses (§469(g)). Freed losses reduce ordinary income first, then the preferential layers (§1(h)). See what happens to suspended passive losses when you sell.

Capital loss carryforwards reach the 25% layer. Net short-term losses and long-term loss carryovers reduce 28% gain first, then unrecaptured §1250 gain, then 0/15/20% gain (§1(h)(4)(B), (h)(6)). They offset only $3,000 of ordinary income, which includes §1245 recapture (§1211(b)).

A former home that became a rental. The §121 home sale exclusion does not cover depreciation taken after May 6, 1997 (§121(d)(6)). That depreciation is taxed even if the rest of the gain is excluded. See selling a rental that was your primary residence.

Real estate professionals. If you qualify as a real estate professional and materially participate, the gain is nonpassive and, if you meet the 500-hour safe harbor in Reg. §1.1411-4(g)(7), it is excluded from net investment income. The recapture rates themselves do not change. See real estate professional status.

What changes recapture, and what does not

There is no filing technique that makes recapture disappear on a cash sale. Here is what each common move actually does.

Missed depreciation can be fixed. If you owned a rental for years without claiming depreciation, your CPA can often claim the missed amount with an automatic accounting method change on Form 3115 (Rev. Proc. 2025-23, §6.01, change number 7). Doing it before the sale means you get the deduction for depreciation you will be taxed on anyway.

Depreciation recapture and installment sales

An installment sale does not spread every layer equally. Under §453(i), "recapture income" means ordinary §1245 and §1250 recapture, and it is recognized in the year of sale even if you receive little cash that year. Unrecaptured §1250 gain is not recapture income: it is reported on the installment method, but Reg. §1.453-12 takes it out of each payment before the lower-rate gain.

That creates two practical results:

• A seller with heavy cost segregation can owe ordinary tax in year one on money they have not received. Plan the cash.
• A seller whose depreciation is all straight-line can spread the up-to-25% layer over the first payments, which can keep more of it in lower brackets.

The installment-specific rules, including how the 25% layer runs through Form 6252, are in the ISC guide to installment sale depreciation recapture. Equipment and business assets are covered in the guide to Section 1245 recapture. You can model layers year by year in the free installment sale calculator.

Where depreciation recapture is reported

• Form 4797, Part III figures the gain on each depreciable property and the §1245 ordinary recapture (line 25b). Line 31 totals the ordinary recapture and carries it to line 13 in Part II, which is combined on line 17.
• Form 4797, Part I receives the remaining §1231 gain (line 6), which becomes long-term capital gain on Schedule D if the net is a gain and there are no prior §1231 losses to recapture.
• Schedule D, line 19 uses the Unrecaptured Section 1250 Gain Worksheet to carve out the layer taxed at up to 25%.
• Form 6252 handles installment sales; Form 8824 handles like-kind exchanges. Both feed Form 4797.
• Form 8960 computes the 3.8% net investment income tax.

Line-by-line walkthroughs are in our Form 4797 guide and Form 8824 guide.

Common mistakes

• Treating 25% as the rate on all depreciation. Cost-seg personal property is §1245, and bonus on land improvements is §1250 additional depreciation. Both are ordinary.
• Forgetting the land allocation. Only the building and its components are depreciated. Allocate price and selling costs between land and building.
• Assuming skipped depreciation means no recapture. "Allowed or allowable" catches it.
• Assuming an installment sale defers everything. §453(i) puts ordinary recapture in year one.
• Ignoring the §1231 lookback. Prior §1231 losses can make this year's gain ordinary.
• Forgetting NIIT. On a passive rental, 3.8% can apply to the whole gain, recapture included.
• Using one state number. California taxes the whole gain at ordinary rates and can have a different basis because of bonus depreciation.

Bottom line

Depreciation recapture is the price of the deductions you took. On a typical rental, it means the depreciation slice of your gain is taxed at up to 25% instead of 15% or 20%, and anything from cost segregation, bonus or equipment is taxed at ordinary rates. It cannot be skipped by not claiming depreciation. It can be deferred with a 1031 exchange, spread in part with an installment sale, offset by freed passive losses, and generally cleared at death. Run the layers before you list the property, not after. The free book shows how sellers time the recapture layers against suspended losses.

Questions to ask your CPA

• How much total depreciation have I taken on this property, and how much is ordinary recapture (§1245 on cost-seg 5- and 7-year parts and §179, §1250(a) on bonus taken on 15-year land improvements) versus straight-line building depreciation?
• Did I miss any depreciation, and should we file Form 3115 before the sale?
• How should the sale price and selling costs be allocated between land, building and components?
• At my income, how much of the unrecaptured §1250 gain will be taxed below the 25% cap?
• Do I have suspended passive losses or capital loss carryforwards that will offset the recapture?
• Do I have net §1231 losses in the last five years that will turn part of this gain into ordinary income?
• Will the 3.8% net investment income tax apply, and does the real estate professional safe harbor help?
• If I sell on an installment note, how much ordinary recapture lands in year one?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.