Depreciation Recapture Tax Calculator
When you sell a depreciable asset at a gain, the IRS recaptures some or all of the depreciation deductions you claimed over the years as ordinary income or as a specially taxed category of gain, rather than treating the entire profit as a preferentially taxed capital gain. The recapture rules differ by asset type. For Section 1245 property, such as equipment, machinery, vehicles, and other personal property, all accumulated depreciation is recaptured as ordinary income, taxed at your marginal rate, up to the amount of the total gain. For Section 1250 property, meaning real property including residential rental buildings and commercial structures depreciated under straight-line MACRS, the accumulated depreciation is characterised as unrecaptured Section 1250 gain taxed at a maximum rate of 25%, rather than at ordinary income rates. Any gain exceeding the accumulated depreciation is treated as long-term capital gain taxed at the standard preferential rates of 0%, 15%, or 20%. To calculate the tax correctly, start with the adjusted basis (original cost plus improvements minus total accumulated depreciation), subtract that from the net sale price after selling costs to get the total gain, then split the gain between the recapture portion and the remaining long-term capital gain. This calculator handles both Section 1245 and 1250 property, computing the adjusted basis, total gain, recapture amount, and the tax owed on each component at your specified rates.
A property purchased for $350,000, sold for $520,000 with $65,455 in depreciation deducted creates a total tax of --.
How depreciation recapture is calculated
Depreciation recapture taxes the gain on sale in layers: ordinary income first (recaptured depreciation), then LTCG at preferential rates. The exact calculation depends on property type.
Section 1245 property (equipment, vehicles): All accumulated depreciation is recaptured as ordinary income. Remaining gain is LTCG.
Section 1250 property (buildings, residential/commercial): Accumulated depreciation is unrecaptured at 25% (or lower if your ordinary rate is less than 25%, which is rare). Remaining gain is LTCG at your preferential rate.
adjusted basis = original cost + improvements - accumulated depreciation
gain = sale price - selling costs - adjusted basis
Section 1245: recapture = min(accumulated depreciation, gain)
Section 1250: unrecaptured = min(accumulated depreciation, gain), taxed at min(rate, 25%)
Planning for depreciation recapture
Depreciation recapture can create significant tax bills because it converts low-taxed LTCG into higher-taxed ordinary income. For example, a property with $100,000 in depreciation and a $200,000 gain might create $100,000 of ordinary income (at your bracket, e.g., 24%) plus $100,000 of LTCG (at 15%), a total effective tax rate of around 19.5% instead of 15%.
One key planning opportunity: a 1031 exchange defers both LTCG and recapture. If you use a 1031 to exchange into another property, you defer taxes on both the depreciation recapture and the LTCG. This allows indefinite tax deferral.
For rental or business property owners, taking depreciation reduces annual taxable income (saving tax each year), but recapture on eventual sale converts that tax savings into future tax due. The math often still favors taking depreciation, because the time value of the tax savings outweighs the future recapture. However, if you plan to hold the property long-term and eventually do a 1031 exchange, the recapture is completely deferred, making depreciation a clear winner.
Depreciation recapture calculator: frequently asked questions
What is depreciation recapture and why does it matter?
Depreciation recapture is a tax rule that converts some of the gain on sale of business or investment property back into ordinary income (instead of long-term capital gains). When you own depreciable property (equipment, buildings, vehicles), you deduct depreciation each year, reducing your taxable income. However, when you sell the property, the IRS recaptures some or all of that depreciation as ordinary income. This means part of your gain is taxed at your higher ordinary tax rate (up to 37%) instead of the lower LTCG rate (20%). The amount and rate depend on the type of property and depreciation method used.
What is the difference between Section 1245 and Section 1250 property?
Section 1245 property includes equipment, machinery, vehicles, and other personal property (non-building assets). When you sell Section 1245 property, ALL accumulated depreciation is recaptured as ordinary income (up to the gain). Section 1250 property includes buildings and structures. For residential rental buildings (27.5-year MACRS) and commercial buildings (39-year MACRS), only 'unrecaptured Section 1250 gain' is taxed at a maximum 25% rate. Since 1986 (when straight-line depreciation became standard), most 1250 property receives favorable treatment: the unrecaptured depreciation is taxed at 25%, not the full ordinary rate.
How is unrecaptured Section 1250 gain different from ordinary recapture?
For modern Section 1250 property (buildings acquired after 1986 and depreciated straight-line), unrecaptured Section 1250 gain is recaptured at the lesser of (1) the taxpayer's ordinary income rate or (2) 25%. So if your ordinary rate is 37%, you pay only 25% on the unrecaptured 1250 gain. This is much better than the 37% you would owe on recapture from Section 1245 property. The 25% rate applies only to the accumulated depreciation, not the total gain.
What if I accelerated depreciation on my property before MACRS?
If you used accelerated depreciation methods (allowed before MACRS in 1987), excess depreciation (the amount above straight-line) is recaptured as ordinary income. The remainder of the accumulated depreciation is unrecaptured 1250 at 25%. For example, if you deducted $100,000 in depreciation, but only $80,000 would have been allowed under straight-line, you recapture $20,000 as ordinary income and $80,000 as unrecaptured 1250. Modern property almost never has this issue, but older property might.
How do I calculate my adjusted basis?
Adjusted basis = original cost + capital improvements - accumulated depreciation taken - casualty losses. Start with the original purchase price. Add any capital improvements (renovations, structural upgrades). Subtract cumulative depreciation deducted on your tax returns. Subtract any casualty loss deductions. This is the adjusted basis at sale. Gain = sale price - selling costs - adjusted basis.
Does holding period affect depreciation recapture?
Yes and no. You must hold Section 1250 property for more than one year to get the unrecaptured 1250 gain treatment (otherwise it is fully ordinary income). However, depreciation recapture does NOT benefit from delayed retirement credits or long-term holding periods. A recapture amount is recaptured the same way regardless of how long you held the property. The difference is only between immediate sale (ordinary income or 25%) and longer holds (no change to recapture treatment, but you get more total gain).
What net-after-tax proceeds mean?
Net after-tax proceeds = sale price - selling costs - gain taxes - any debts paid off at sale. It is the cash you pocket after the IRS, state and local taxes, and fees. This is the amount available to reinvest, distribute, or use. Many investors focus on net after-tax proceeds to evaluate whether a sale and reinvestment (or 1031 exchange) is worthwhile.
Official sources
- IRS Publication 544 (Sales of Assets): Publication 544.
- IRS Publication 946 (How to Depreciate Property): Publication 946.
- IRS Schedule D (Capital Gains and Losses): Schedule D.
- IRC Sections 1245 and 1250 (statute governing depreciation recapture).
Reviewed by the CalculatorHub team, edited by James Graham, 13 June 2026. See our methodology. General information, not financial advice.