Depreciation Recapture Calculator

Depreciation recapture is a tax provision that requires you to pay back some of the tax benefits you received from depreciation deductions when you sell a depreciated asset at a gain. When you own rental property or business equipment, you claim depreciation deductions that reduce your taxable income each year. However, these deductions also reduce your "adjusted basis" in the property. When you sell, if the sale price exceeds your adjusted basis, the IRS "recaptures" some of those tax benefits by taxing the gain attributable to depreciation at potentially higher rates than regular capital gains. This ensures taxpayers don't get a permanent tax break from depreciation when property values actually increase.

Section 1245 and 1250 refer to different types of depreciable property with different recapture rules: Section 1245 covers personal property like equipment, machinery, vehicles, and furniture. All depreciation is recaptured and taxed as ordinary income at your marginal tax rate (up to 37%). Section 1250 covers real property (buildings, structures, rental properties). For real estate placed in service after 1986 using straight-line depreciation, recapture is taxed at a maximum rate of 25% (called "unrecaptured Section 1250 gain"). This is more favorable than Section 1245. The distinction matters significantly—selling equipment worth $100k with $50k depreciation could result in $50k taxed at 32%+ while the same situation with real estate would be taxed at maximum 25%.

Depreciation recapture is calculated in steps: (1) Calculate Original Basis = Purchase price + Capital improvements. (2) Calculate Adjusted Basis = Original Basis - Total Depreciation Taken. (3) Calculate Total Gain = Sale Price - Selling Costs - Adjusted Basis. (4) Determine Recapture Amount = Lesser of (Total Gain) or (Total Depreciation Taken). (5) Calculate Capital Gain = Any gain above the original basis. Example: You bought a rental for $300k, took $50k depreciation, and sold for $400k with $24k in selling costs. Original basis = $300k. Adjusted basis = $250k. Net proceeds = $376k. Total gain = $126k. Recapture = $50k (taxed at 25%). Capital gain = $76k (taxed at 0/15/20%). Total tax depends on your brackets.

There are several strategies to defer or reduce depreciation recapture: (1) 1031 Exchange - Swap your property for a "like-kind" property and defer all taxes, including recapture. This is the most common strategy for real estate investors. (2) Installment Sale - Spread the gain over multiple years by receiving payments over time, potentially staying in lower tax brackets. (3) Opportunity Zone Investment - Reinvest gains into qualified opportunity zones for potential deferral and reduction. (4) Charitable Remainder Trust - Donate property to a CRT to avoid immediate taxation. (5) Die with the property - Stepped-up basis at death eliminates recapture (but obviously not ideal planning!). Note: You cannot avoid recapture entirely if you sell outright—it's the "price" of depreciation deductions.

Depreciation recapture rates depend on property type: Real Estate (Section 1250): Maximum 25% rate for unrecaptured Section 1250 gain. If your ordinary income rate is below 25%, you may pay less. Equipment/Vehicles (Section 1245): Ordinary income rates (10-37% depending on your bracket). This is why equipment recapture is often more costly. Capital Gains Portion: Any gain above original basis (true appreciation) is taxed at long-term capital gains rates (0%, 15%, or 20%). High earners may also owe the 3.8% Net Investment Income Tax (NIIT) on top of these rates. Example breakdown on $100k total gain with $60k depreciation: $60k recapture at 25% = $15k tax, $40k capital gain at 15% = $6k tax, Total = $21k (21% effective rate).

If you sell depreciated property at a loss (below adjusted basis), there is no depreciation recapture. Recapture only applies when there is a gain. The loss is typically deductible: For rental property (Section 1231): Losses are generally deductible against ordinary income (subject to passive activity rules). For personal property: Section 1245 losses reduce ordinary income. For property used for both business and personal: Only the business portion generates a deductible loss. Important: If you sell below your adjusted basis but above what it would have been without depreciation, there's still no recapture—you simply have a smaller loss than you otherwise would have. Always track your basis carefully to accurately report gains or losses.

Technically, depreciation is mandatory for rental property, not optional. The IRS requires you to reduce your basis by the "allowable" depreciation whether or not you actually claimed it. This means: (1) If you didn't claim depreciation deductions, you still must reduce your basis as if you did when calculating gain on sale. (2) You'll owe recapture tax on depreciation you "should have" taken even if you didn't get the tax benefit. (3) This is called "allowed or allowable" depreciation. Therefore, always claim your depreciation deductions! Not claiming them means losing the annual tax benefit while still owing recapture at sale. Residential rental property depreciates over 27.5 years; commercial property over 39 years. If you missed depreciation in past years, you can file Form 3115 to claim it.

A 1031 exchange (like-kind exchange) is the most powerful tool to defer depreciation recapture. Here's how it works: (1) You sell your property and use a qualified intermediary to hold proceeds. (2) Within 45 days, identify replacement properties; within 180 days, close on one. (3) All gain, including depreciation recapture, is deferred—you pay no tax at the time of exchange. (4) Your basis in the new property is reduced by the deferred gain (carryover basis). Key points: The depreciation recapture isn't eliminated, just deferred until you sell the replacement property (unless you do another 1031). You can continue exchanging indefinitely, potentially deferring until death when heirs get stepped-up basis. Boot (cash received) is taxable—recapture is recognized first. 1031 exchanges only apply to real property held for investment or business, not personal residences or inventory.