Depreciation Recapture Calculator: Estimate Your Tax at Sale

How recapture works

When you dispose of property whose basis has been reduced by depreciation, the IRS recovers the tax benefit of that depreciation through recapture. Section 1245 applies to personal property and 15-year land improvements. Section 1250 applies to real property, with the unrecaptured portion capped at the 25% rate. Net Investment Income Tax adds 3.8% for taxpayers over the threshold.

Why cost seg creates recapture exposure

A cost segregation study reclassifies up to 40% of basis into shorter recovery periods for accelerated depreciation. That same reclassified basis becomes Section 1245 property subject to ordinary recapture rates at sale, which can be materially higher than the 25% cap on unrecaptured 1250 gain.

1031 exchange defers recapture

A like-kind exchange under IRC Section 1031 defers both Section 1245 recapture and unrecaptured 1250 gain. Basis carries over. The trap: when the replacement property is eventually sold without another exchange, accumulated depreciation across both properties is recaptured at the higher ordinary or 25% rates.

Frequently asked questions

What is Section 1245 recapture and how is it taxed?

Section 1245 recapture applies to depreciation taken on personal property and 15-year land improvements. At disposition, that depreciation is recaptured as ordinary income at the taxpayer's marginal federal rate up to 37%, plus state tax. This is the higher rate class of recapture. Cost segregation studies expand the 1245 portion of the basis by reclassifying 20% to 40% of the building into 5, 7, and 15-year property.

What is unrecaptured Section 1250 gain?

Unrecaptured Section 1250 gain is the depreciation taken on real property (27.5 or 39-year) that is recaptured at disposition. It is capped at a 25% federal rate, plus Net Investment Income Tax of 3.8% for taxpayers over the $200K single or $250K joint threshold, plus state tax. The 25% cap is the primary reason cost seg's Section 1245 exposure is higher than the 1250 exposure it displaces.

How does Net Investment Income Tax apply to recapture?

NIIT under IRC Section 1411 adds 3.8% to net investment income when modified AGI exceeds $200K single or $250K married filing jointly. Both Section 1245 recapture and unrecaptured Section 1250 gain from rental property sales are net investment income for NIIT purposes. A REPS-qualified taxpayer with material participation may exclude the gain from NIIT under Reg. 1.1411-4(g)(7).

Does a 1031 exchange eliminate depreciation recapture?

No. A like-kind exchange under IRC Section 1031 defers Section 1245 recapture and unrecaptured 1250 gain but does not eliminate either. Basis carries over to the replacement property. When the replacement property is eventually sold without another exchange, accumulated depreciation across all exchanged properties is recaptured at the higher ordinary or 25% rates.

Should I skip cost segregation to avoid recapture?

No. The time value of the accelerated deduction almost always exceeds the incremental recapture tax at a normal hold period. A $250K first-year deduction at 32% saves $80K in year one. Recaptured at 37% seven years later costs $92.5K in nominal dollars but well under $80K in present value at any reasonable discount rate. The recapture calculator quantifies this precisely.

Does depreciation still get recaptured if I die owning the property?

No. Under IRC Section 1014, property receives a step-up in basis to fair market value at the owner's date of death. The step-up eliminates both accumulated depreciation and unrealized gain. Heirs sell with no recapture and no capital gain up to date-of-death value. This is the reason 'swap till you drop' pairs a 1031 chain with the Section 1014 step-up.

How is recapture calculated when only part of the property is sold?

Recapture is calculated on the depreciation allocated to the sold portion. If half a duplex is sold, half of the accumulated depreciation is recaptured under the applicable Section 1245 or 1250 rules. Cost segregation reports assign depreciation to specific components, which makes partial-asset dispositions cleaner than lump-sum tracking. Form 4797 reports the recapture.