Depreciation Recapture Calculator
Calculate depreciation recapture tax when selling rental property or business assets. Understand Section 1250 and Section 1245 recapture rules and plan for tax liability.
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About This Calculator
Depreciation recapture is a tax provision that requires you to pay taxes on the depreciation deductions you claimed when you sell a property or asset. While depreciation reduces your taxable income during ownership, the IRS "recaptures" those deductions at sale. Understanding depreciation recapture is essential for real estate investors and business owners planning to sell assets.
What Is Depreciation Recapture? When you own rental property or business assets, you deduct depreciation each year to account for wear and tear. These deductions lower your taxable income. When you sell, the IRS requires you to pay back some of those tax benefits - this is depreciation recapture.
Two Types of Depreciation Recapture:
- Section 1250 (Real Property): Recaptured at maximum 25% rate
- Section 1245 (Personal Property): Recaptured at ordinary income rates (up to 37%)
Why Depreciation Recapture Matters:
- Can significantly reduce net sale proceeds
- Often forgotten when calculating expected profits
- Affects decision to sell vs. continue holding
- 1031 exchanges can defer recapture taxes
Who Needs to Understand This:
- Rental property owners
- Commercial real estate investors
- Business owners with depreciable equipment
- Anyone who has claimed depreciation deductions
This calculator helps you estimate depreciation recapture taxes when selling property or assets. For capital gains planning, see our Capital Gains Tax Calculator. For tax deferral strategies, visit our 1031 Exchange Calculator.
How to Use the Depreciation Recapture Calculator
- 1Enter the original purchase price of the property.
- 2Input the land value (land cannot be depreciated).
- 3Add any capital improvements made during ownership.
- 4Enter the expected or actual sale price.
- 5Input estimated selling costs (agent fees, closing costs).
- 6Enter the number of years you owned the property.
- 7Select the property type (residential, commercial, equipment).
- 8Choose your federal tax bracket.
- 9Select your filing status for NIIT calculation.
- 10Review the depreciation recapture and total tax estimates.
Understanding Depreciation Recapture
Depreciation recapture ensures the IRS recovers tax benefits from depreciation deductions.
How Depreciation Works
During Ownership:
- You deduct depreciation annually
- Reduces your taxable rental income
- Lowers your cost basis in the property
At Sale:
- Gain = Sale Price - Adjusted Basis
- Adjusted Basis = Original Cost - Accumulated Depreciation
- Recapture = Tax on depreciation previously deducted
Example
| Item | Amount |
|---|---|
| Purchase price | $500,000 |
| Land value | $100,000 |
| Depreciable basis | $400,000 |
| Years owned | 10 |
| Annual depreciation | $14,545 |
| Total depreciation | $145,450 |
| Sale price | $700,000 |
| Adjusted basis | $354,550 |
| Total gain | $345,450 |
| Depreciation recapture (25%) | $36,363 |
| Remaining capital gain (15%) | $29,999 |
Types of Gain at Sale
| Gain Type | Tax Rate | Description |
|---|---|---|
| Depreciation Recapture | 25% max (Sec 1250) | Previously deducted depreciation |
| Long-Term Capital Gain | 0%, 15%, or 20% | Appreciation above original cost |
| NIIT | 3.8% | Additional tax for high earners |
Section 1250 vs. Section 1245 Recapture
Different types of property have different recapture rules.
Section 1250: Real Property
Applies To:
- Residential rental property (27.5-year depreciation)
- Commercial property (39-year depreciation)
- Other buildings and structures
Tax Treatment:
- "Unrecaptured Section 1250 Gain"
- Maximum tax rate of 25%
- Only straight-line depreciation recaptured
- Better than ordinary income rates
Section 1245: Personal Property
Applies To:
- Business equipment
- Vehicles
- Machinery
- Office furniture
- Computer equipment
Tax Treatment:
- Full recapture at ordinary income rates
- Can be taxed up to 37%
- All depreciation is recaptured as ordinary income
- More aggressive than Section 1250
Comparison
| Feature | Section 1250 | Section 1245 |
|---|---|---|
| Property type | Real property | Personal property |
| Depreciation period | 27.5 or 39 years | 5-7 years typically |
| Maximum recapture rate | 25% | 37% (ordinary rates) |
| Method | Straight-line | Accelerated allowed |
Bonus Depreciation Recapture
Special Rules:
- 100% bonus depreciation must be recaptured
- Recaptured at ordinary income rates
- Can create significant tax liability
- Plan for recapture when using bonus depreciation
Calculating Your Depreciation
Accurate depreciation calculation is essential for recapture planning.
Depreciation Methods
Straight-Line Depreciation:
- Annual depreciation = Depreciable basis ÷ Recovery period
- Most common for real estate
- Required for residential and commercial property
Recovery Periods:
| Property Type | Recovery Period |
|---|---|
| Residential rental | 27.5 years |
| Commercial property | 39 years |
| Qualified Improvement Property | 15 years |
| Appliances/Carpet | 5 years |
| Land improvements | 15 years |
| Business equipment | 5-7 years |
| Vehicles | 5 years |
Depreciable Basis Calculation
Formula: Depreciable Basis = Purchase Price - Land Value + Improvements - Credits
Components:
| Item | Treatment |
|---|---|
| Purchase price | Included |
| Closing costs | Most are included |
| Land value | Excluded (not depreciable) |
| Improvements | Added to basis |
| Tax credits taken | Reduce basis |
Adjusted Basis at Sale
Formula: Adjusted Basis = Original Cost Basis - Accumulated Depreciation
Important:
- Must reduce basis by allowable depreciation
- Even if you didn't claim it!
- "Allowed or allowable" depreciation reduces basis
Strategies to Minimize Depreciation Recapture
Several strategies can reduce or defer depreciation recapture taxes.
1031 Exchange
How It Works:
- Sell property and reinvest in "like-kind" property
- Defer ALL gain including depreciation recapture
- No limit on number of exchanges
- Depreciation carries over to new property
Requirements:
- 45-day identification period
- 180-day closing deadline
- Must be investment or business property
- Cannot be personal use property
Installment Sale
Benefits:
- Spread gain over multiple years
- May keep you in lower tax brackets
- Defer some recapture to future years
Limitations:
- Depreciation recapture recognized in year of sale
- Only capital gain can be spread out
- Interest on deferred payments is taxable
Opportunity Zone Investment
Benefits:
- Defer gain by investing in Qualified Opportunity Fund
- Potential for partial basis step-up
- Gains from QOF can be tax-free if held 10+ years
Cost Segregation Reversal
Strategy:
- Accelerated depreciation increases recapture
- Consider straight-line if sale is planned
- Weigh current deductions vs. future recapture
Holding Until Death
Estate Planning:
- Heirs receive stepped-up basis
- All depreciation recapture eliminated
- All capital gains eliminated
- Most tax-efficient if planning to leave to heirs
Net Investment Income Tax (NIIT)
High-income taxpayers face an additional 3.8% tax on investment income.
NIIT Basics
What Is NIIT:
- 3.8% tax on net investment income
- Applies to modified AGI above thresholds
- Includes capital gains and depreciation recapture
- Part of Affordable Care Act
Income Thresholds
| Filing Status | Threshold |
|---|---|
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
| Head of Household | $200,000 |
How NIIT Applies to Property Sales
Example:
- Married couple, $300,000 MAGI
- Property sale gain: $200,000
- MAGI over threshold: $50,000
- NIIT taxable: Lesser of $200K or $50K = $50,000
- NIIT tax: $50,000 × 3.8% = $1,900
Strategies to Reduce NIIT
Timing:
- Sell in years with lower income
- Spread sales across multiple years
- Use 1031 exchanges to defer
Offsetting:
- Harvest investment losses
- Increase deductions in sale year
- Contribute to retirement plans
State Tax Considerations
State taxes can significantly impact your total tax on property sales.
State Capital Gains Taxes
High-Tax States:
| State | Top Rate |
|---|---|
| California | 13.3% |
| New Jersey | 10.75% |
| New York | 10.9% |
| Oregon | 9.9% |
| Minnesota | 9.85% |
No State Income Tax:
- Alaska, Florida, Nevada, New Hampshire (dividends/interest only)
- South Dakota, Tennessee, Texas, Washington, Wyoming
State Treatment of Depreciation
Considerations:
- Some states don't follow federal depreciation rules
- May have different recapture calculations
- State-specific 1031 exchange rules
- Installment sale treatment varies
Multi-State Issues
Property Located in Different State:
- Generally taxed where property is located
- May also owe tax in your home state
- Credit usually available for taxes paid to other states
Planning Strategies
Residency Changes:
- Some investors move before selling
- Must be true change of domicile
- States may audit residency claims
- California has aggressive "clawback" rules
Pro Tips
- 💡Always claim depreciation on rental property - you'll be taxed as if you did anyway.
- 💡Consider a 1031 exchange to defer both depreciation recapture and capital gains.
- 💡Factor depreciation recapture into your ROI calculations before selling.
- 💡Keep detailed records of your cost basis, improvements, and depreciation claimed.
- 💡Consult a tax professional before selling property with significant depreciation.
- 💡Consider installment sales to spread capital gains (recapture still due in year 1).
- 💡Plan sales in years when your income is lower to reduce NIIT impact.
- 💡Remember state taxes can add significantly to your total tax liability.
- 💡Holding until death eliminates all depreciation recapture through stepped-up basis.
- 💡Use cost segregation studies carefully - more current deductions means more recapture.
- 💡Review your depreciation schedule before listing property for sale.
- 💡Consider Opportunity Zone investments as an alternative to 1031 exchanges.
Frequently Asked Questions
For real property (rental buildings), depreciation recapture is taxed at a maximum rate of 25% under Section 1250. For personal property (equipment, vehicles), it's recaptured at ordinary income rates up to 37% under Section 1245. Additionally, high earners may owe 3.8% NIIT on top of these rates.
