Depreciation recapture is the US tax rule that taxes the portion of gain on the sale of depreciated property attributable to depreciation already deducted, under a different and often harsher rate regime than the rest of the gain receives.
In plain terms
Every dollar of depreciation taken against a property during ownership lowers that property’s tax basis — and lowering the basis increases the eventual gain at sale, dollar for dollar. Recapture is the IRS’s way of taxing that increase differently than ordinary capital gain, on the theory that a deduction already claimed against ordinary-rate income shouldn’t quietly convert into a lower-taxed gain later. Which rate applies depends entirely on what kind of asset generated the depreciation in the first place.
How it works
Real property — the building shell itself, depreciated straight-line under MACRS — falls under IRC §1250. Gain attributable to that depreciation is labeled “unrecaptured Section 1250 gain” and carved out of the standard long-term capital gains brackets, taxed instead at a flat rate capped at 25% regardless of the taxpayer’s other income, per IRS Topic No. 409.
The short-life components a cost segregation study reclassifies — equipment, certain fixtures, specific electrical and plumbing serving machinery — fall under IRC §1245 instead. Section 1245 recapture has no 25% ceiling: gain up to the full amount of depreciation claimed on that component is taxed as ordinary income, at whatever marginal rate the taxpayer otherwise faces. For a high earner, that is the top ordinary bracket rather than a capped rate — a materially worse outcome dollar for dollar than §1250 treatment.
Both forms of recapture can be deferred, not eliminated, by rolling the sale proceeds into a 1031 exchange; the embedded recapture travels into the replacement property’s basis along with the rest of the gain. The one event that erases recapture exposure entirely is death: an heir who receives the property gets a stepped-up basis, and because there’s no sale, there’s no gain — recaptured or otherwise — to tax.
The numbers
- Unrecaptured §1250 gain rate: capped at a maximum 25%, regardless of the taxpayer’s ordinary bracket — IRS Topic No. 409, applicable for tax year 2026.
- §1245 recapture rate: ordinary income rates, up to the top 2026 bracket of 37% for income above $640,600 (single) or $768,700 (married filing jointly), with no 25% ceiling.
- Deferred, not forgiven: a 1031 exchange rolls both §1250 and §1245 recapture exposure into the replacement property rather than eliminating it.
- Eliminated entirely: a stepped-up basis at death, since there is no disposition to trigger recapture.
What people get wrong
That depreciation recapture is one rule with one rate. It’s actually two separate regimes with a meaningful gap between them — the 25% cap on §1250 gain from the building shell, and the fully uncapped ordinary-income treatment of §1245 gain from reclassified components. That gap cuts directly against a common assumption about cost segregation: moving more of a building’s cost into short-life, §1245 categories accelerates today’s deductions, but it also moves a larger share of the eventual sale gain into the less favorable recapture bucket. The study that saves money now and the recapture bill at sale are the same mechanism working in opposite directions, and the tradeoff rarely gets mentioned in the same conversation as the upfront savings.
Related
Read more: Real Estate as an Investment: How the Wealthy Actually Use Property · Taxes: How Wealth Is Structured and Preserved
See also: Cost segregation · 1031 exchange · Step-up in basis