Guides
Depreciation Recapture: How It Works and How It’s Taxed
Depreciation recapture is the tax rule that turns part of your gain on the sale of business or investment property back into ordinary income, up to the amount of depreciation you previously deducted. It exists because depreciation writes off an asset against ordinary income (taxed up to 37%), and Congress does not want that same amount taxed again at lower capital gains rates when you sell. You report it on IRS Form 4797, and the character of the gain depends on whether the asset is Section 1245 property (personal property) or Section 1250 property (real property).
What is depreciation recapture?
Depreciation recapture is a mechanism that taxes some or all of your gain on a sale as ordinary income, limited to the depreciation you claimed while you owned the asset. When you depreciate an asset, you lower its adjusted basis, which increases the gain on a later sale. Recapture reclassifies the portion of that gain tied to depreciation so it does not receive preferential capital gains treatment.
The rule only bites when you sell at a gain. If you sell at a loss, there is nothing to recapture, and the loss is generally an ordinary Section 1231 loss. Recapture also cannot exceed your total gain: if the gain is smaller than the depreciation taken, recapture is capped at the gain.
Two Internal Revenue Code sections govern the character of that gain. Section 1245 covers depreciable personal property and recaptures depreciation as ordinary income. Section 1250 covers depreciable real property and, for most modern assets, taxes the depreciation-related gain as “unrecaptured Section 1250 gain” at a maximum 25% rate.
Section 1245 property: recapture as ordinary income
Section 1245 applies to depreciable tangible personal property (machinery, equipment, vehicles, furniture) and most amortizable intangibles. On a gain sale, all prior depreciation, or the amount that was allowable if you did not actually claim it, is recaptured as ordinary income. The recapture equals the lesser of the total depreciation taken or the total gain. Any gain above the depreciation is Section 1231 gain, generally eligible for long-term capital gain rates.
Because Section 1245 recapture is taxed at ordinary rates (up to 37% for individuals in 2026), it is the least favorable form of recapture. There is no 25% cap and no straight-line carve-out.
Worked example. A business buys a machine for $50,000, claims $30,000 of depreciation, and sells it for $60,000. Adjusted basis is $20,000, so the total gain is $40,000. The first $30,000 (all depreciation taken) is recaptured as ordinary income under Section 1245. The remaining $10,000 is Section 1231 gain, generally taxed at capital gain rates.
If the same machine sold for only $35,000, the gain would be $15,000. Recapture is capped at the $15,000 gain, all ordinary income, with no Section 1231 gain on top.
Section 1250 property: unrecaptured gain at 25%
Section 1250 applies to depreciable real property, such as buildings and structural components, that is not Section 1245 property. It only recaptures “additional depreciation,” meaning depreciation claimed above the straight-line amount. For real property placed in service after 1986, only straight-line depreciation is allowed, so true Section 1250 recapture is usually zero.
The depreciation still does not escape. The gain attributable to straight-line depreciation is taxed as “unrecaptured Section 1250 gain” at a maximum federal rate of 25%, higher than the 15% or 20% long-term capital gain rate but lower than ordinary rates. Gain above the depreciation is regular Section 1231 / long-term capital gain.
Worked example. An investor buys a commercial building for $500,000, claims $100,000 of straight-line depreciation, and sells for $700,000. Adjusted basis is $400,000, so the total gain is $300,000. The $100,000 tied to depreciation is unrecaptured Section 1250 gain, taxed at up to 25%. The remaining $200,000 is long-term capital gain, taxed at 0%, 15%, or 20% depending on income. Your actual rate on the 25% slice may be lower if your ordinary bracket is under 25%.
Section 1245 vs Section 1250: side by side
| Feature | Section 1245 | Section 1250 |
|---|---|---|
| Property type | Depreciable personal property, most intangibles | Depreciable real property (buildings, structures) |
| What is recaptured | All depreciation taken (or allowable) | Only depreciation above straight-line (“additional”) |
| Tax rate on recaptured amount | Ordinary income, up to 37% | Additional depreciation: ordinary. Straight-line portion: unrecaptured 1250 gain at max 25% |
| Common result post-1986 | Full recapture on gain sales | Little or no ordinary recapture; 25% gain on straight-line |
| Excess gain above depreciation | Section 1231 / capital gain | Section 1231 / capital gain |
| Reported on | Form 4797, Part III, line 25 | Form 4797, Part III, line 26 |
The core difference: Section 1245 hits the full depreciation at ordinary rates, while Section 1250 mostly routes the depreciation through a capped 25% rate because straight-line depreciation does not trigger ordinary recapture.
How to report it on Form 4797
Form 4797, Sales of Business Property, is where you calculate and report depreciation recapture. Part III (lines 19 through 26) figures the recapture on each asset, then splits the gain into its ordinary and capital components, which flow to the other parts and onto your return.
The reporting path generally works as follows:
- Part III, per asset: List gross sales price, adjusted basis (cost minus depreciation), and total gain. Section 1245 recapture is computed on line 25; Section 1250 recapture on line 26.
- Ordinary income: The recaptured amount from Part III carries to Part II as ordinary income, then to Schedule 1 (Form 1040) and into your ordinary income.
- Section 1231 / capital gain: The remaining gain moves to Part I and, if it is long-term capital gain, to Schedule D.
- Unrecaptured Section 1250 gain: This amount is tracked on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions and taxed at the 25% maximum rate through the Schedule D Tax Worksheet.
Keep depreciation schedules from every year you owned the asset. Recapture is based on depreciation “allowed or allowable,” so the IRS can recapture depreciation you were entitled to claim even if you never deducted it. See our guide to Form 4562, depreciation and amortization for how those deductions are tracked, and our overview of depreciation methods for why straight-line matters to Section 1250.
The 1031 exchange deferral angle
A properly structured Section 1031 like-kind exchange can defer depreciation recapture along with capital gain, but it does not erase it. If you exchange into replacement real property of equal or greater value, reinvest all net equity, and replace any debt, both the recapture and the gain roll into the new property’s basis and wait for a future taxable sale.
The catch is “boot.” If you receive cash or non-like-kind property, or reduce your debt without offsetting it, the recognized gain up to the boot amount is taxed first as depreciation recapture, then as capital gain. To defer recapture fully, the replacement property must also carry depreciable improvements at least equal in value to the depreciable property you gave up.
Since 2018, Section 1031 applies only to real property, so this deferral path is closed for Section 1245 personal property. See our detailed guide to the Section 1031 like-kind exchange for the 45-day and 180-day timing rules. Understanding your starting cost basis is essential, because the deferred recapture attaches to the carryover basis in the replacement asset.
Frequently asked questions
Is depreciation recapture taxed at 25%?
Not always. The 25% maximum rate applies only to unrecaptured Section 1250 gain on real property, meaning the gain attributable to straight-line depreciation on buildings. Section 1245 recapture on personal property (equipment, vehicles) is taxed at ordinary income rates, up to 37% for individuals in 2026. Your actual 1250 rate can be lower if your ordinary bracket falls below 25%.
How do I calculate depreciation recapture?
Start with your adjusted basis (original cost plus improvements, minus all depreciation taken). Subtract it from the sales price to find total gain. For Section 1245, recapture equals the lesser of total depreciation claimed or total gain, taxed as ordinary income. For Section 1250, the straight-line depreciation portion of the gain is unrecaptured 1250 gain at up to 25%, with any excess as capital gain.
Do you pay depreciation recapture if you sell at a loss?
No. Depreciation recapture only applies when you sell at a gain, because recapture cannot exceed the gain realized. If you sell business property for less than its adjusted basis, you generally have a Section 1231 loss, which is treated as an ordinary loss and can offset other income, subject to the Section 1231 lookback rules.
Can a 1031 exchange avoid depreciation recapture?
A Section 1031 exchange can defer, not permanently avoid, depreciation recapture on real property. Full deferral requires trading up in value, reinvesting all equity, replacing debt, and acquiring at least equal depreciable improvements. Any boot received triggers recognized gain, taxed first as recapture. The deferred recapture carries into the replacement property’s basis and is due on a later taxable sale.
What happens to recapture when property is inherited?
Property that passes at death generally receives a step-up in basis to fair market value under Section 1014, which eliminates the built-in gain and the associated depreciation recapture for the heir. This is why holding appreciated, depreciated real estate until death can wipe out recapture that a 1031 exchange only defers. State rules and estate size can affect the outcome.
Which form reports depreciation recapture?
You report depreciation recapture on IRS Form 4797, Sales of Business Property. Part III figures the recapture per asset, with Section 1245 on line 25 and Section 1250 on line 26. The ordinary recapture flows to Part II and Schedule 1, while capital gain flows to Part I and Schedule D. Unrecaptured Section 1250 gain is tracked through the Schedule D worksheets at 25%.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.