Depreciation recapture calculator

A rental bought for $400,000 and sold for $650,000 after eight years has a taxable gain of $299,487, not $250,000, because $94,487 of depreciation lowered the basis along the way. That $94,487 is unrecaptured section 1250 gain, taxed at your ordinary rate up to 25%. The other $205,000 is a long-term gain at 15%. For a single filer with $120,000 of other taxable income, the federal tax is $53,554, the net investment income tax is $8,952, and a 5% state tax adds $14,974: $77,481, or 25.9% of the gain.

The calculator works out the depreciation from the purchase and the months you held the property, or takes the amount you actually deducted. It splits the gain into its layers, stacks them on your other income the way the tax forms do, and shows the tax on each layer and the cash you keep.

Who reaches for this

You enter the purchase price, closing costs, the share of the price that is land, any improvements, the months you held the property and the sale. The calculator computes straight-line depreciation over 27.5 years for residential rentals or 39 years for commercial property, or uses the depreciation you tell it you took. It reduces the basis, finds the gain and divides it into layers.

Then it stacks the layers on your other taxable income in the order the tax forms use: your ordinary income first, then any section 1245 recapture, then the unrecaptured section 1250 gain, then the remaining long-term gain. Each layer is taxed at its own rate, and the net investment income tax and a flat state rate are added. The result is the tax on the sale and the cash you keep after paying off the loan. Depreciation earlier in the property’s life is covered on the Section 179 and bonus depreciation calculator, and the return on the deal before tax is on the cash on cash return calculator.

Depreciation lets you deduct part of the cost of a building or equipment each year against your income, even though the property may not be losing value. Each deduction also lowers the property’s tax basis, the number the sale price is compared with. When you sell for more than the lowered basis, the gain includes the amount you deducted. The tax system takes that part back at a rate higher than the one that applies to ordinary capital gains. That is recapture.

Take a building bought for $324,800 of depreciable cost and deducted at $11,811 a year. After eight years the deductions total $94,487 and the basis has fallen by that amount. If the building then sells for its original price, the whole $94,487 is a taxable gain, even though you did not make any profit on the property. It is the deductions reversing. The tax you pay on that piece is the price of having received the deductions earlier.

A gain on depreciable property is not taxed as one lump. It has layers with different rates, and the calculator shows each.

Section 1245 covers personal property and short-life components: appliances, furniture, equipment, vehicles, and the parts of a building that a cost segregation study reclassifies. All of the depreciation taken on it, up to the gain, is recaptured as ordinary income.

Section 1250 covers the building. For property placed in service after 1986, depreciated straight-line, there is no ordinary-income recapture on the building itself. Instead, the gain up to the straight-line depreciation is unrecaptured section 1250 gain, taxed at your ordinary rate but no higher than 25%. Because a person in the 32%, 35% or 37% bracket pays only 25% on this layer, the cap is a real benefit at high incomes. A person in the 12% bracket pays 12% on it, since the cap is a ceiling and not a floor.

Everything starts with the adjusted basis, which is your cost plus capital improvements minus depreciation. Residential rental buildings are depreciated straight-line over 27.5 years and nonresidential buildings over 39 years, under a mid-month convention in the first and last year. Land is never depreciated, so the purchase price is split between land and building, usually from the property tax assessment or an appraisal.

The example price is $400,000 plus $6,000 of closing costs. With 20% allocated to land, the depreciable building basis is $406,000 × 80% = $324,800. Over 27.5 years, that is $11,811 a year, and over 96 months it is $324,800 × 96 ÷ 330 = $94,487. The adjusted basis is $406,000 − $94,487 = $311,513. The calculator uses months held and ignores the mid-month timing in the first and last year, which moves the total by about a month of depreciation.

Allowed or allowable

The rule that surprises owners is that depreciation reduces basis whether or not you claimed it. The word in the tax code is “allowed or allowable.” If you owned a rental for eight years and never deducted depreciation, the IRS treats your basis as reduced by the amount you could have deducted. You lose the deductions and still owe the tax.

Suppose the example owner never claimed depreciation and assumes the basis is still $406,000. The gain would look like $205,000 and the tax like $46,362. The true gain is $299,487 and the tax $77,481, a difference of $31,119. There is a way to fix missed depreciation by filing an accounting method change, and a tax professional can do it. Skipping the deduction is never a way to avoid recapture.

Commercial buildings and long holds

A commercial building is depreciated over 39 years, so the annual deduction is smaller and the recapture layer builds more slowly. The same $324,800 building held 96 months has $66,626 of depreciation instead of $94,487, the gain is $271,626, and the total tax is $68,215.

Time works the other way for a residential rental. Depreciation stops once the building is fully depreciated, after 27.5 years, so the recapture layer has a ceiling equal to the depreciable basis. A rental held 20 years and sold for $900,000 has $236,218 of depreciation, a gain of $676,218 and a total tax of $193,852, or 28.7% of the gain. The recapture layer is larger in a long hold, and so is the share of the gain that is appreciation.

A single filer sells the rental after 96 months for $650,000. Selling costs are 6%, or $39,000, so the amount realized is $611,000. The loan payoff is $280,000. Other taxable income for the year is $120,000, and the state tax rate is 5%.

After the $77,481 of tax and the $280,000 loan payoff, the owner keeps $253,519 of the $611,000. The recapture layer, $22,804 on $94,487, is an effective 24.1% and the capital gain layer 15%. The net investment income tax is a surprise to many sellers: because the sale pushes income over $200,000, it applies to the excess, which here is $235,587.

The order matters. The tax forms stack the pieces of income from the bottom: your other ordinary income first, then section 1245 recapture, then unrecaptured section 1250 gain, then the rest of the long-term gain. Each piece is taxed according to where it sits in the stack.

In the example, $120,000 of other income fills the brackets up to the middle of the 24% bracket. The unrecaptured 1250 gain of $94,487 sits from $120,000 to $214,487. The part from $120,000 to $201,775, $81,775, is in the 24% bracket, so the 25% cap does not bind and it is taxed at 24%, or $19,626. The last $12,712 crosses into the 32% bracket, where the cap does bind, so it is taxed at 25%, or $3,178. Together that is $22,804. The 25% is a ceiling: the blended rate on this layer is 24.1%.

The long-term gain sits above the recapture, from $214,487 to $419,487. All of it is below the $545,500 point where the 20% rate begins for a single filer in 2026, so it is taxed at 15%. If it had started below $49,450, the first part would be at 0%. Because recapture stacks first, it uses up any room in the 0% and low brackets before the rest of the gain does.

The tax depends on the other income in the year of the sale, not just on the gain. The same $299,487 gain produces very different bills.

A low-income year leaves room in the low brackets for the recapture layer, and it brings the overall federal rate down. A high-income year pushes the recapture into the 25% cap and part of the capital gain into the 20% bracket. Selling in a year when other income is lower, for example after retiring or between jobs, can reduce the tax by tens of thousands of dollars on a large gain. The calculator lets you change the other income to test it, and the table of other sale prices shows how the rate on the gain falls as the price rises, since a larger share of the gain is taxed at the 15% rate.

The 3.8% net investment income tax applies to the smaller of your net investment income and the amount your modified adjusted gross income exceeds a threshold: $200,000 for single filers, $250,000 for joint filers and $125,000 for married filing separately. Those thresholds are set by statute and are not adjusted for inflation. A gain on a rental is generally net investment income, unless you are in a real estate business that is not passive.

In the example, income before the sale is $120,000 of taxable income plus the $16,100 standard deduction, and the gain adds $299,487, for modified adjusted gross income of about $435,587. That is $235,587 over the threshold, less than the $299,487 gain, so the tax is 3.8% of $235,587, or $8,952. A larger gain or smaller other income changes which of the two limits applies.

State tax varies from nothing to over 10% of the gain, and many states tax gains as ordinary income and have their own rules for depreciation. The calculator applies a flat rate you enter. It is a simplification, and your state may differ. Check its rules.

A cost segregation study reclassifies parts of a building, such as flooring, fixtures, appliances and site work, as short-life property that can be depreciated over 5, 7 or 15 years. With 100% bonus depreciation available for property acquired after January 19, 2025, much of that cost can be deducted in the first year. The deductions come early. The catch is the character of the gain at the sale.

Suppose the owner had a study move $60,000 of the building into short-life property and deducted all of it. The remaining building depreciation falls to $77,033. If the components are worth $45,000 at the sale, their basis is zero, so $45,000 of gain is section 1245 recapture, taxed as ordinary income. Unrecaptured section 1250 gain is $77,033, and the long-term gain is $220,000. Total gain is $342,033, and the tax is $90,361, or 26.4% of the gain, against $77,481 without the study.

That is not a verdict against cost segregation. The study brought $42,546 more depreciation deductions, worth about $10,200 at a 24% rate when taken. The sale costs $12,880 more, so on the surface the owner is behind by about $2,700. The benefit is the timing: the deductions arrived years before the tax, and the money could work in between. Whether the study pays depends on how long you hold, what rate you were in, and how you use the cash. The Section 179 calculator shows the present value of faster depreciation.

It helps to see depreciation as a trade and not a trap. You took $94,487 of deductions. At a 24% rate, they saved $22,677 of tax in the years you owned the property. At the sale, the recapture layer costs $22,804. On those numbers the two roughly cancel, and the owner is $127 behind before considering time.

The time is the point. Tax saved each year could be spent, invested or used to pay down a loan, and tax owed at the sale is paid years later. The trade also improves if your rate when you sold is lower than when you deducted, and it worsens if it is higher. And it can end at zero if the property passes to heirs with a stepped-up basis, since the gain disappears with the recapture.

None of this changes the rule that you owe the tax whether or not you deducted. It only explains why claiming depreciation is almost always right: skipping it gives up the deductions and leaves the recapture.

The calculator shows the tax if you sell and pay. Several strategies can change the picture. They need professional advice, and the calculator does not model them.

Each of these has conditions and costs. An exchange has strict identification and closing deadlines. A step-up is not a plan you can choose to use. An installment sale carries the risk of the buyer’s payments. Treat the list as a set of questions for your tax adviser.

Keep the records

Recapture is computed from your depreciation history, so the records matter. Keep the closing statement showing the price and costs, the land and building allocation, receipts for every capital improvement, each year’s depreciation schedule and any cost segregation report. Rebuilding them years later from tax returns is possible, and it is easier when they are in one place. A preparer who has to guess the basis will often guess conservatively, and that can cost you.

Read the return on the deal before tax with the cash on cash return calculator, or see the value of faster depreciation with the Section 179 calculator.