Depreciation Recapture Calculator

Depreciation recapture is the portion of your gain on the sale of a depreciated asset that gets taxed differently from ordinary capital gain, because depreciation deductions you claimed over the years reduced your taxable income at the time. When you sell, the IRS "recaptures" some or all of that benefit by taxing the depreciation-attributable gain at a higher rate than the standard 0/15/20% long-term capital gains rates (IRS Publication 544).

Section 1245 applies to personal property and equipment (machinery, appliances, furniture, vehicles) — all depreciation taken is recaptured as ordinary income, up to the lesser of the depreciation claimed or the total gain. Section 1250 applies to real property (buildings) depreciated using the straight-line method — the depreciation-attributable gain is "unrecaptured Section 1250 gain," taxed at a maximum rate of 25% (or your ordinary rate if lower), which is more favorable than full ordinary-income treatment.

Gain equals the amount realized (sale price minus selling costs like commissions and closing costs) minus your adjusted basis. Adjusted basis is your original cost plus capital improvements, minus all depreciation you claimed while you owned the asset (IRS Publication 946, "Adjusted Basis").

No. Depreciation recapture cannot exceed the actual gain you realize on the sale. If the sale results in a loss (or breaks even), there is no depreciation recapture and no capital gains tax, even if you claimed substantial depreciation over the years.

Yes. For a rental or investment property (not a trade or business you materially participate in), both the recaptured-depreciation portion and the remaining capital gain count as net investment income. The 3.8% NIIT applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 (single/head of household) or $250,000 (married filing jointly) — IRC §1411.

Unrecaptured Section 1250 gain is the depreciation-attributable portion of gain on real property that was depreciated straight-line. Congress capped its rate at 25% — higher than standard LTCG rates but lower than the top 37% ordinary rate — as a middle-ground policy between full capital-gains treatment and full ordinary-income recapture. It's computed on the Schedule D "Unrecaptured Section 1250 Gain Worksheet" and reported via Form 4797, Sales of Business Property.

A like-kind exchange under Section 1031 lets you defer both the capital gain and the depreciation recapture on real property by rolling the proceeds into another investment property, rather than eliminating the tax. See our 1031 Exchange Calculator to model a deferral instead of an outright sale.

No. Under IRC §453(i), depreciation recapture (both §1245 ordinary recapture and unrecaptured §1250 gain) must be reported and taxed in full in the year of sale, even if you're using the installment method and collecting payments over several years. Only the gain in excess of recapture — the remaining §1231/capital gain — can be spread across installment payments as they're received. This calculator models a single lump-sum sale; if you're structuring an installment sale, budget for the full recapture tax bill in year one regardless of how the sale price is actually collected.