Depreciation Recapture Calculator
Depreciation Recapture Calculator 2025
Calculate Section 1250 & 1245 recapture tax on rental property, commercial real estate, and business equipment
Property Details
Section 1250 - Max 25% recapture rate
Land is not depreciable
Sale Details
Commissions, closing costs, etc.
Your Tax Situation
Affects capital gains rate & NIIT
Depreciation Summary
Depreciable Basis
$0
Annual Depreciation
$0
Total Depreciation (10 yrs)
$0
Adjusted Basis
$0
Tax Liability Breakdown
Sale price - Adjusted basis
$0 @ 25%
$0 @ 0%
Effective rate on gain: 0.0%
Net Proceeds
After all taxes and selling costs
What is Depreciation Recapture?
Depreciation recapture is the IRS requirement to "recapture" (pay back) the tax benefits you received from depreciation deductions when you sell a business asset for more than its adjusted basis. The depreciation you claimed reduced your taxable income over the years, and now the IRS wants its share when you profit from the sale.
Section 1250 vs Section 1245 Recapture
The tax treatment depends on the type of property:
- Section 1250 (Real Estate): Residential and commercial property depreciated using straight-line method. The "unrecaptured Section 1250 gain" is taxed at a maximum rate of 25% - more favorable than ordinary income rates.
- Section 1245 (Personal Property): Equipment, vehicles, furniture, and machinery. ALL depreciation is recaptured as ordinary income, taxed at your marginal rate (10-37%).
How to Calculate Depreciation Recapture Tax
The calculation involves several steps:
- Calculate Depreciable Basis: Purchase price minus land value, plus capital improvements.
- Determine Total Depreciation: Annual depreciation × years owned (capped at depreciable basis).
- Find Adjusted Basis: Original cost + improvements - accumulated depreciation.
- Calculate Total Gain: Net sale price - adjusted basis.
- Split the Gain: Recapture portion (up to depreciation claimed) taxed at 25% (Section 1250) or ordinary rates (Section 1245). Remaining gain taxed as long-term capital gains (0%, 15%, or 20%).
Pro Tip: You can defer depreciation recapture tax indefinitely using a 1031 Like-Kind Exchange. This allows you to roll the proceeds into a new investment property without triggering immediate tax liability.
2025 Tax Rates for Depreciation Recapture
Understanding the applicable tax rates is crucial for planning:
- Section 1250 Unrecaptured Gain: Maximum 25% (applies to straight-line depreciation on real estate)
- Section 1245 Recapture: Ordinary income rates (10-37% based on your tax bracket)
- Long-Term Capital Gains: 0%, 15%, or 20% based on taxable income
- NIIT: Additional 3.8% on investment income if MAGI exceeds $200K (single) or $250K (married)
Strategies to Minimize Depreciation Recapture Tax
Several legal strategies can help reduce or defer your tax liability:
- 1031 Exchange: Defer all taxes by reinvesting in like-kind property within 180 days.
- Installment Sale: Spread the gain over multiple years to stay in lower tax brackets.
- Opportunity Zone Investment: Invest gains in a Qualified Opportunity Zone fund for potential tax reduction.
- Charitable Remainder Trust: Donate the property and receive an income stream while avoiding immediate capital gains.
- Hold Until Death: Heirs receive a stepped-up basis, eliminating all deferred recapture.
About This Calculator
Calculate depreciation recapture tax when selling rental property, commercial real estate, or business equipment. Section 1250 (25% max) vs Section 1245 (ordinary income) recapture, 2025 capital gains rates, NIIT calculation, 1031 exchange deferral options, and adjusted basis tracking.
Frequently Asked Questions
What is depreciation recapture and why is it taxed?
Depreciation recapture is IRS requirement to pay back tax benefits from depreciation deductions when selling business property for more than adjusted basis. 2025 tax treatment: (1) Section 1245 (personal property/equipment) - all depreciation recaptured as ordinary income at 10-37% rates, (2) Section 1250 (real estate) - only excess over straight-line recaptured at 25% "unrecaptured Section 1250 gain", (3) Remaining gain taxed as long-term capital gains 0-20%. Example: $500k rental property, $400k original cost, $100k depreciation 鈫?$400k basis. Sell for $550k = $150k gain. Split: $100k @ 25% (recapture) + $50k @ 15-20% (LTCG).
How is Section 1250 recapture different from Section 1245?
Key differences (2025): Section 1245 (equipment/vehicles/furniture) - ALL depreciation recaptured as ordinary income (10-37% tax rate). Example: $50k truck, depreciated to $20k, sell for $45k 鈫?$30k depreciation + $15k gain = both taxed as ordinary income. Section 1250 (buildings/rental property) - only excess depreciation over straight-line method recaptured. Most real estate uses straight-line, so recapture limited to "unrecaptured Section 1250 gain" at 25% max rate, not ordinary 37%. Example: $1M rental, $364k straight-line depreciation (27.5yr), sell for $1.2M 鈫?$364k @ 25% + $200k gain @ 15-20% LTCG. Section 1250 more favorable for real estate investors.
How do I calculate my adjusted basis for depreciation recapture?
Adjusted Basis = Original Cost + Capital Improvements - Accumulated Depreciation. 2025 example: Buy rental property $400k (2015), capital improvements $50k (new roof 2020, HVAC 2023), accumulated depreciation $145k (10 years 脳 $14.5k/yr) 鈫?Adjusted Basis = $400k + $50k - $145k = $305k. Sell for $550k 鈫?Total gain = $245k. Split: $145k unrecaptured Section 1250 gain (depreciation) @ 25%, $100k LTCG ($550k-$450k original cost+improvements) @ 15-20%. Track improvements carefully: repairs are deductible (ordinary), improvements increase basis (reduce recapture). Form 4562 depreciation records + receipts required for audit defense.
Can I avoid depreciation recapture with a 1031 exchange?
Yes! 1031 like-kind exchange defers depreciation recapture and capital gains indefinitely if done correctly (2025 rules): Must exchange for "like-kind" real estate (residential-to-commercial OK, but not personal property), use qualified intermediary (cannot touch sale proceeds), identify replacement within 45 days, close within 180 days, replacement value 鈮?sale price, reinvest all equity. Example: Sell $500k rental (basis $300k, $200k gain), exchange for $600k property 鈫?No tax due, $300k basis carries over to new property (depreciation clock resets at $600k). Partial exchange: If take $50k cash "boot" 鈫?Recapture triggered on $50k only. Death planning: Heirs get step-up in basis to FMV, erasing all deferred recapture (IRC Section 1014).
What tax rate applies to depreciation recapture in 2025?
2025 recapture rates: (1) Section 1245 - Ordinary income rates 10-37% based on tax bracket (applies to equipment/vehicles/personal property), (2) Section 1250 unrecaptured gain - 25% flat rate (applies to straight-line depreciation on real estate), (3) Excess Section 1250 (accelerated over straight-line) - 25%, but rare since most real estate uses straight-line post-1986, (4) Remaining long-term capital gain - 0% (<$47,025 single/<$94,050 married), 15% ($47,025-$518,900/$94,050-$583,750), 20% (above thresholds), (5) Net Investment Income Tax (NIIT) - additional 3.8% if MAGI >$200k single/$250k married. Total max: 25% + 3.8% = 28.8% on recapture, 20% + 3.8% = 23.8% on LTCG.
How do I report depreciation recapture on my tax return?
2025 filing requirements: (1) Form 4797 Sale of Business Property - report sale price, adjusted basis, gain calculation, split recapture vs capital gain (Part I for Section 1231 property, Part II for ordinary assets, Part III for Section 1250 recapture), (2) Schedule D - report LTCG portion from Form 4797 line 11, (3) Form 8949 - if required for capital asset details, (4) Form 1040 Schedule 1 - ordinary income from Section 1245 recapture flows here, (5) Form 4562 - reference accumulated depreciation from prior years. Keep records: depreciation schedules, improvement invoices, closing statements (HUD-1/settlement), appraisals, Form 1099-S from buyer. State taxes: Most states follow federal recapture rules but some (CA/NY/NJ) have different rates or treatment - consult CPA for multistate sales.