Depreciation recapture when you sell a rental property: unrecaptured section 1250 gain
When you sell a rental building, the gain that comes from depreciation you claimed is taxed at up to 25%, higher than the usual capital gain rates. The IRS calls it unrecaptured section 1250 gain, and it is figured on depreciation allowed or allowable, so skipping depreciation does not avoid it. A sale is reported on Form 4797.
What depreciation recapture means
Each year you own a rental you deduct depreciation, which lowers your taxable income and also lowers your tax basis in the property. When you sell, the lower basis makes your gain bigger. The part of the gain that is equal to the depreciation you took is the part the tax law treats differently, because it is the tax you deferred along the way. See how rental depreciation works over 27.5 years for the yearly side.
The IRS describes the rules in Publication 544, Sales and Other Dispositions of Assets. Two things are going on, and people mix them up.
- Section 1250 recapture as ordinary income: gain on selling real property is ordinary income to the extent of additional depreciation, meaning depreciation above straight-line. Residential rental buildings are depreciated straight line, so this part is usually zero, but your tax preparer will check.
- Unrecaptured section 1250 gain: the part of a long-term capital gain on real property that is due to depreciation. The IRS says it is taxed at a maximum 25% rate.
The rates that apply to a sale
The IRS page on capital gains and losses says unrecaptured section 1250 gain from selling real property is taxed at a maximum 25% rate. The rest of a long-term gain is taxed at 0%, 15% or 20% depending on your taxable income. Your own rate on the depreciation part can be lower than 25% if your ordinary bracket is lower. The net investment income tax may also apply on top, see NIIT on rental income.
A worked example
Example a made-up owner bought a rental for $440,000, of which $110,000 was land and $330,000 was the building. Straight-line depreciation on the building is about $12,000 a year, simplified here to exactly $12,000, and she took it for 10 years: $120,000 in all.
| Step | Amount |
|---|---|
| Original cost | $440,000 |
| Less depreciation taken | $120,000 |
| Adjusted basis at sale | $320,000 |
| Sale price | $520,000 |
| Less selling costs | $30,000 |
| Amount realized | $490,000 |
| Gain ($490,000 minus $320,000) | $170,000 |
| Part due to depreciation (unrecaptured section 1250 gain) | $120,000 |
| Remaining gain from appreciation | $50,000 |
The $120,000 is taxed at up to 25%, which is at most $30,000. The $50,000 is taxed at the ordinary long-term capital gain rate for her income. If that rate is 15%, the tax is $7,500, so the most the federal income tax would be is $37,500, before any state tax or NIIT. Her preparer will do the exact calculation.
Why not taking depreciation does not help
Publication 544 uses the greater of depreciation allowed or allowable. Allowed means what you claimed; allowable means what you could have claimed. If you never claimed it, the IRS still treats your basis as reduced by the amount you should have taken, so you pay the recapture tax without ever having had the deduction. If you missed it, Form 3115 can fix it.
Where a sale is reported
The sale of rental real estate is reported on Form 4797, Sales of Business Property, and its result flows to Schedule D and your Form 1040 where the gain is capital gain. Publication 544 sends you to Part III of Form 4797 to figure any ordinary income part. Your preparer needs the closing statement, the original purchase closing statement, a depreciation schedule and a list of improvements since you bought.
Improvements add to your basis and are depreciated too, so a new roof you paid for five years ago both raised your basis and produced its own depreciation, which is part of the recapture. Keep the invoices for every capitalized improvement with your sale file. Without them, your preparer cannot prove the higher basis, and a lower basis means a bigger taxable gain.
Ways owners plan around it
Recapture cannot be wished away, but timing and structure matter. A like-kind exchange can defer the gain and the recapture, with strict deadlines, see 1031 exchange deadlines. Selling in a year with lower income can place the gain in a lower bracket. Whether a partial sale, an installment sale or another approach fits your situation is a question for your tax preparer before you sign a contract, not after.
How DoorKeeping handles it
Each property in DoorKeeping has its own books and ledger, so the purchase, improvements and expenses of the property you are selling are in one place to hand to your preparer. Because one LLC owns one property, a sale does not tangle the other properties' numbers. DoorKeeping does not compute your gain or file Form 4797 and gives no tax advice, so use your tax preparer for the sale.
Sources
- IRS, Publication 544, Sales and Other Dispositions of Assets (2025), read Oct 30, 2026
- IRS, Topic no. 409, Capital gains and losses, read Oct 30, 2026
Questions
- What is the tax rate on depreciation recapture for a rental?
- Unrecaptured section 1250 gain, the part of the gain due to depreciation on real property, is taxed at a maximum 25% rate according to the IRS. Your rate can be lower if your ordinary rate is lower.
- Do I owe recapture if I never claimed depreciation?
- Yes in effect. The IRS uses the greater of depreciation allowed or allowable, so your basis is reduced by what you could have claimed.
- What form reports the sale of a rental property?
- Form 4797, Sales of Business Property, which feeds Schedule D and your Form 1040. Your tax preparer completes it from the closing statement and your depreciation schedule.