Why It Matters
Here's why this matters every time you sell a rental property: you've been deducting depreciation for years, which lowered your taxable income. When you sell, the IRS reclaims a portion of that benefit by taxing your "unrecaptured Section 1250 gain" at up to 25% — higher than the standard 0–20% long-term capital gains rate most sellers expect on appreciation. The more depreciation you've claimed and the longer you've held, the bigger this bill gets. Knowing the number before you list is the difference between a deal that makes sense and one that doesn't.
At a Glance
- What it is: The IRS recapture tax on depreciation claimed for real property (buildings, structural components), capped at 25%
- Who it hits: Any investor who claimed depreciation on residential or commercial real estate and then sells
- The rate: Maximum 25% — higher than standard long-term capital gains rates of 0%, 15%, or 20%
- What triggers it: A sale, exchange, or other disposition of depreciated real property
- How to defer it: A 1031 exchange pushes the §1250 gain into the replacement property's basis; death eliminates it via step-up
Unrecaptured §1250 Gain = Total Straight-Line Depreciation Claimed on Real Property
How It Works
The mechanics of unrecaptured gain. Every year you own a rental property, you claim depreciation — $9,091 per year on a $250,000 building over the standard 27.5-year residential schedule. That depreciation lowers your adjusted basis in the property. When you sell, the IRS calculates your total gain as sale price minus adjusted basis, and then splits it into two buckets. The depreciation you claimed forms the "unrecaptured Section 1250 gain," taxed at up to 25%. Any additional appreciation above your original purchase price gets taxed at the standard long-term capital gains rate of 0%, 15%, or 20%, depending on your income.
How §1250 differs from §1245. Section 1250 covers real property — the building itself and structural components like the roof, HVAC, or plumbing. Section 1245 covers personal property — appliances, carpeting, fixtures — and hits harder: that recapture is taxed at ordinary income rates, which can reach 37%. The §1250 cap at 25% is the better deal, though still a meaningful bite. Note that a cost segregation specialist can reclassify some building components into §1245 territory, which accelerates your current-year deductions but increases your §1245 exposure when you sell.
Three ways to manage it. First, a 1031 exchange defers the §1250 gain entirely — the gain carries into the replacement property's adjusted basis and only becomes due when you eventually sell without exchanging. Second, holding until death eliminates the gain; heirs receive the property at fair market value (stepped-up basis under IRC §1014), wiping out the accumulated depreciation. Third, an installment sale spreads the gain across multiple tax years, which can keep you in lower brackets each year. This is the kind of exit planning that depreciation recapture makes essential.
Real-World Example
Jennifer bought a duplex in Columbus, Ohio, for $312,000 in 2013 — $62,000 land, $250,000 building. She claimed $9,091 in depreciation each year and sold in 2024 after 11 years: $100,000 in total depreciation claimed, adjusted basis down to $212,000.
She sold for $419,000, generating a $207,000 total gain. Her CPA split it: $100,000 is unrecaptured §1250 gain (taxed at 25%) and $107,000 is pure appreciation (taxed at 15% in her bracket). That's $25,000 in §1250 tax and $16,050 in capital gains — $41,050 total before state taxes.
Jennifer had looked at an installment sale to spread the hit across three years, but her buyer needed conventional financing. She did a 1031 exchange into a fourplex in Indianapolis instead, deferring all $207,000 of gain. The §1250 clock reset against the new property's basis.
Pros & Cons
- The 25% maximum rate is lower than ordinary income rates (up to 37%), so §1250 is less punishing than §1245 recapture on personal property
- You can fully defer §1250 gain with a 1031 exchange, extending your investment runway without triggering the tax
- An installment sale lets you spread the gain across years, potentially keeping you in a lower bracket each year
- Holding to death eliminates the gain entirely — heirs inherit at stepped-up basis with no recapture liability
- Knowing your §1250 exposure upfront lets you build the exit cost into your original underwriting, so there are no surprises
- Most investors underestimate the §1250 bill because they only think about appreciation, not depreciation recapture
- The tax is unavoidable on a straight sale — there's no exclusion equivalent to the primary residence $250K/$500K exemption
- A 1031 exchange defers the gain; unless you hold until death, the bill eventually comes due on the replacement property
- Cost segregation studies can shift recapture into §1245 territory, meaning ordinary income rates instead of the 25% §1250 cap
- State income taxes often add 3–9% on top of the federal rate, pushing the real effective rate toward 28–34% in high-tax states
Watch Out
- Forgetting land value: The §1250 calculation only applies to the depreciable building, not the land. If you overstate the building portion when you bought, you may have overclaimed depreciation — which creates an even larger recapture hit and a potential audit flag.
- Partial-year sales: If you sell mid-year, you can still claim partial-year depreciation for that year — but it adds to your §1250 exposure. Run the numbers before deciding whether to close in December or January.
- Cost segregation timing: A cost segregation study done in year 3 of a 10-year hold can dramatically increase your §1245 recapture. Get a cost segregation specialist to model both the current-year savings and the eventual exit tax before you pull the trigger.
- 1031 basis tracking: The deferred §1250 gain reduces the replacement property's adjusted basis — every exchange adds a layer. Keep meticulous records, and don't assume the 1031 exchange advisor who structures the deal will be around when you exit five years later.
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The Takeaway
Section 1250 recapture is the price of having claimed depreciation — and it's a price worth knowing before you sell. On a property held for a decade, the unrecaptured gain alone can generate a $20,000–$50,000 federal tax bill. That's not a reason to avoid depreciation; it's a reason to plan exits the same way you plan acquisitions. Whether you defer with a 1031, spread it via an installment sale, or hold until your heirs inherit at stepped-up basis, there's almost always a smarter move than a straight taxable sale. Know your adjusted basis, run the gain calculation before you list, and loop in your CPA on which exit strategy fits.