What is the difference between Section 1245 and Section 1250?

Section 1245 applies to personal property and certain real property components (the 5-, 7-, and 15-year buckets in MACRS). Section 1250 applies to real property (27.5-year residential and 39-year nonresidential). The rate cap differs: Section 1245 recapture is taxed at ordinary income rates, while unrecaptured Section 1250 gain is capped at 25%.

Does holding longer reduce recapture?

Holding longer does not reduce the recapture portion. Accumulated depreciation is what is recaptured, and that amount continues to grow each year you own the property. Holding longer can convert more of the appreciation portion of the gain into LTCG, but the recapture portion remains fixed by depreciation taken.

Can NIIT push recapture above ordinary rates?

Yes. NIIT adds 3.8% on top of Section 1245 recapture, unrecaptured 1250 gain, and LTCG for taxpayers over the income threshold. A high-income taxpayer not REPS-qualified can face 37% plus 3.8% equals 40.8% on Section 1245 recapture.

Does a 1031 exchange eliminate recapture?

No. A 1031 exchange defers recapture into the replacement property's basis. The deferred amount remains owed to the IRS and is paid when the replacement property is sold in a fully taxable disposition. Only an estate basis step-up under IRC Section 1014 at the owner's death eliminates the deferred recapture.

How does a basis step-up at death erase recapture?

IRC Section 1014 generally sets the heir's basis equal to the fair market value at the decedent's date of death. The accumulated depreciation, the deferred 1031 recapture, and any cost segregation acceleration are all reset to zero from the heir's perspective. The heir can sell immediately with no recapture exposure on the pre-death depreciation.

Should I avoid cost segregation because of recapture?

For most investors, no. The time value of accelerated deductions, especially under 100% bonus depreciation under OBBBA, materially exceeds the recapture cost at disposition for any holding period of three years or more, and the recapture is deferred via 1031 or eliminated via Section 1014 in most exit scenarios. Investors who plan to sell quickly and pay tax in full are the exception.

Does Section 469(g) help with recapture?

Yes, when applicable. Under Section 469(g), a fully taxable disposition of an entire activity releases all suspended passive losses against any income, including recapture income. Investors who accumulated suspended losses during ownership can offset recapture income at disposition, partially or fully neutralizing the tax.

What about installment sales?

Section 1245 recapture is generally recognized in the year of sale even on an installment sale under IRC Section 453(i), not pro-rated across the installment payments. Unrecaptured 1250 gain follows the installment method. This rule frequently surprises sellers and reduces the cash-flow benefit of installment treatment.

Does depreciation recapture apply to partial dispositions?

Yes. A partial disposition election under Treas. Reg. 1.168(i)-8 allows you to write off the remaining basis of a component when it is replaced (e.g., a roof). The component's accumulated depreciation is recaptured at the partial disposition. The new component starts fresh.

How does state tax affect recapture?

Most states tax recapture at the state's ordinary income rate. There is no state equivalent of the federal 25% unrecaptured 1250 cap in most states. State-level conformity to federal recapture rules is generally clean (recapture is rarely the area where states decouple from federal), but the rate stack can push the all-in marginal cost on recapture into the 40-50% range in high-tax states.

Depreciation Recapture Explained: How Section 1245 and Unrecaptured Section 1250 Gain Hit You When You Sell

By Zawwad Ul Sami, Founder, WeCostSegPublished: 2026-05-14Last updated: 2026-05-14

When you sell depreciable property, the IRS recovers the tax benefit of the depreciation you took through a mechanism called recapture. Section 1245 recapture applies to personal property and 15-year land improvements and is taxed at ordinary income rates. Unrecaptured Section 1250 gain applies to real property and is capped at the 25% federal rate. The Net Investment Income Tax adds 3.8% for taxpayers over the threshold. A 1031 exchange defers (but does not eliminate) both flavors of recapture.

What recapture actually is

Depreciation is the tax deduction you take during ownership for the wear, tear, and obsolescence of an income-producing asset. Recapture is the corresponding adjustment at disposition. The IRS treats accumulated depreciation as a tax benefit you must give back, at least in part, when you sell. Without recapture, taxpayers could convert ordinary deductions into long-term capital gain on every disposition. Recapture closes that conversion arbitrage.

Two code sections do most of the work for real estate. Section 1245 covers depreciation on personal property and certain real property components. Section 1250 covers depreciation on real property. The rates and computation differ. Cost segregation studies push more of your basis into the Section 1245 bucket, which is why understanding the rate differential matters before you choose to accelerate depreciation.

Recapture is computed at the property level, not portfolio-wide. Each disposition triggers its own recapture computation. Suspended passive losses can offset recapture income when the property is sold in a fully taxable disposition under IRC Section 469(g), which is why some taxpayers hold suspended losses through to disposition deliberately.

Section 1245 recapture: ordinary rates on personal property

Section 1245 of the Internal Revenue Code recaptures depreciation on property that has been depreciated under MACRS as 5-year, 7-year, or 15-year property. Most personal property fits this bucket: appliances, carpet, furniture, equipment, decorative finishes, and 15-year land improvements like paving and landscaping. The recapture amount equals the lesser of total gain on disposition or the accumulated depreciation on the Section 1245 portion of the basis.

The kicker: Section 1245 recapture is taxed at ordinary income rates, not at the preferential 25% Section 1250 cap. For a high-income taxpayer at the 37% federal bracket, recaptured 5-year and 15-year depreciation costs 37% federal plus state plus potentially 3.8% NIIT, for a marginal cost approaching 45%. That is the same rate the taxpayer paid on W-2 wages.

Cost segregation amplifies Section 1245 exposure precisely because the entire purpose of the study is to move basis from 27.5- or 39-year real property (which falls under Section 1250) into 5-, 7-, and 15-year property (which falls under Section 1245). The acceleration benefit during ownership is real. The acceleration cost at disposition is also real.

Unrecaptured Section 1250 gain: the 25% cap on real property

Section 1250 recapture applies to depreciation taken on real property such as the 27.5-year residential rental shell or the 39-year nonresidential building. Under current law, Section 1250 recapture applies only to depreciation in excess of straight-line, which is rare because MACRS uses straight-line for real property by default. So pure Section 1250 recapture rarely produces ordinary income for real estate investors.

What does produce a tax bill is unrecaptured Section 1250 gain. This is the portion of the long-term capital gain on real property that is attributable to depreciation. It is taxed at a maximum 25% federal rate under IRC Section 1(h)(1)(E), regardless of the taxpayer's marginal ordinary rate. The 25% cap is meaningfully better than the up-to-37% ordinary rate that applies to Section 1245 recapture.

The arithmetic shows up clearly on dispositions of properties that were the subject of a cost segregation study. The portion of accumulated depreciation taken on 5-, 7-, and 15-year property comes back at ordinary rates. The portion taken on the 27.5- or 39-year real property comes back capped at 25%. Cost seg trades 25% recapture for 37% recapture in exchange for taking the deductions sooner.

The NIIT layer adds 3.8%

The Net Investment Income Tax under IRC Section 1411 adds an additional 3.8% on net investment income for taxpayers whose modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). Rental income and capital gains on rental property are both investment income for NIIT purposes when the activity is passive. For REPS-qualified taxpayers, the income from rental activities is nonpassive and generally outside the NIIT base.

Practically, NIIT stacks on top of Section 1245 recapture, unrecaptured Section 1250 gain, and LTCG for taxpayers over the threshold. A taxpayer who is not REPS-qualified and is over the NIIT threshold faces a 37% + 3.8% = 40.8% marginal cost on Section 1245 recapture. The same taxpayer faces 25% + 3.8% = 28.8% on unrecaptured 1250 and 20% + 3.8% = 23.8% on LTCG.

How recapture is actually computed

The computation works in tiers. Start with total gain on disposition, which equals sale price minus adjusted basis. Adjusted basis equals original cost minus accumulated depreciation. The accumulated depreciation is then split: the portion taken on Section 1245 property is the Section 1245 layer, and the portion taken on Section 1250 property is the unrecaptured 1250 layer.

Section 1245 recapture is the lesser of total gain or the Section 1245 accumulated depreciation, taxed at ordinary rates. The remaining gain (total gain minus Section 1245 recapture) is then allocated: the portion equal to accumulated 1250 depreciation is unrecaptured 1250 gain (taxed at the 25% cap), and the balance is long-term capital gain (taxed at 15% or 20% depending on income). NIIT applies to all three tiers for taxpayers over the threshold whose income is not REPS-shielded.

Worked example: $1.2M residential rental sold after 5 years

Original purchase price $1.2M, of which $200K was allocated to land (excluded from depreciation). Depreciable basis: $1M. A cost segregation study at acquisition reclassified $250K into 5-year personal property and $80K into 15-year land improvements, leaving $670K on the 27.5-year residential schedule.

After five years of ownership with 100% bonus depreciation on the reclassified portion and straight-line on the real property, accumulated depreciation is approximately $400K total: $330K on the Section 1245 portion (5-year and 15-year items, fully depreciated under bonus) and roughly $70K on the Section 1250 portion (five years of 27.5-year straight-line on $670K basis).

Sale at $1.5M. Adjusted basis $800K ($1.2M minus $400K accumulated depreciation). Total gain $700K. Section 1245 recapture: $330K at 37% ordinary equals $122K federal. Unrecaptured 1250: $70K at 25% equals $17.5K. Remaining LTCG: $300K at 20% equals $60K. NIIT (if applicable): 3.8% across all three layers equals roughly $27K. Total federal tax at sale: roughly $226K, plus state.

Compare this to the no-cost-seg path where the same $400K would have been entirely on the 27.5-year schedule and recaptured as unrecaptured 1250 at 25%, producing roughly $100K of federal tax. The cost-seg path produced an extra $126K of federal recapture at sale. The tradeoff is the additional $148K of year-one tax savings (from the $293K of accelerated deductions at a combined 37% marginal rate, less the straight-line that would have applied anyway). Time value of the year-one savings net of the year-five recapture cost almost always favors cost seg for any holding period of three years or more.

Why cost segregation amplifies recapture exposure

A cost segregation study reclassifies 20-40% of basis from 27.5 or 39-year real property into 5-, 7-, and 15-year property under Sections 1245 and 1250. That reclassified basis is depreciated faster during ownership. It is also recaptured at higher rates at disposition.

The tradeoff is time value plus rate arbitrage. Time value: the dollar of deduction taken today is worth more than the dollar of additional tax paid in year five or year ten. Rate arbitrage: the savings during ownership are at the taxpayer's then-current marginal rate. The recapture cost is at the rate that applies at disposition. If the taxpayer's marginal rate drops between acquisition and sale (retirement, lower-income year, REPS qualification, exit to a 1031), the arbitrage favors cost seg.

Investors who do not plan to sell, who plan to 1031-exchange forever, or who plan to die holding the property at a stepped-up basis under IRC Section 1014 face less recapture exposure. The cost seg deductions amplify their tax savings without ever creating recapture in their lifetime. This pattern is the strongest argument for cost segregation when the holding plan is buy-and-hold across generations.

1031 exchange defers all of it

A like-kind exchange under IRC Section 1031 defers both Section 1245 recapture and unrecaptured Section 1250 gain into the replacement property's basis. The exchange does not eliminate the recapture. It carries it forward. Basis from the relinquished property carries over (the exchanged basis), and any additional cash invested in the replacement property creates excess basis that depreciates on a fresh schedule.

The mechanics under Treas. Reg. 1.168(i)-6 require tracking exchanged basis and excess basis separately for depreciation purposes. Exchanged basis continues on the relinquished property's remaining recovery period and method. Excess basis depreciates on a new schedule. A cost segregation study on the replacement property runs against the excess basis cleanly, but the exchanged basis portion already has its depreciation history baked in.

The trap most investors hit: when the replacement property is eventually sold without another exchange, the accumulated depreciation across all the exchanged properties is recaptured at the higher rates. Section 1031 only defers. It does not erase. Properly structured estate planning at death under Section 1014 can erase the deferred recapture entirely via the basis step-up, which is why long-hold-and-die is the most tax-efficient strategy for accumulated cost-seg basis.

How to plan recapture across a portfolio

Three planning levers reduce the practical impact of recapture. First, time the disposition to a year of lower marginal rate. Retirement years, sabbatical years, and high-deduction years (charitable, NOL carryforward, business loss) all reduce the ordinary rate that applies to Section 1245 recapture.

Second, use a 1031 exchange when the replacement property fits the portfolio strategy. The deferral is mechanical and the rules are well-settled under Rev. Proc. 2000-37 (reverse exchanges) and Rev. Proc. 2002-22 (TIC structures). A qualified intermediary handles the cash. You handle the timing.

Third, plan the exit at death where possible. Under IRC Section 1014, the heir takes a basis equal to the fair market value at death. The deferred recapture from prior exchanges and the entire accumulated depreciation taken during ownership disappear at the basis step-up. This is the strongest single tax-planning lever in real estate and the primary reason buy-and-hold-forever beats trade-frequently.

Track 1245 and 1250 accumulated depreciation separately on every property in your portfolio. CPAs sometimes lump them together.
Time the year-of-sale to your lowest expected marginal rate.
Use 1031 to defer when the replacement property is right, but do not force a bad replacement just to defer.
Coordinate with your estate plan. The basis step-up at death is the strongest single tool.
Consider Section 469(g) on disposition to release suspended passive losses against the recapture.

The recapture calculator

Our depreciation recapture calculator handles the tier-by-tier computation including the 25% cap, the NIIT layer, and the 1031 deferral comparison. Enter original purchase price, land value, accumulated 5/7/15-year depreciation, accumulated real property depreciation, sale price, your federal ordinary and LTCG rates, your state rate, and whether NIIT applies. The calculator returns Section 1245 recapture, unrecaptured 1250, LTCG, and the total tax due, with a side-by-side comparison if you toggle 1031.

Frequently asked questions

What is the difference between Section 1245 and Section 1250?: Section 1245 applies to personal property and certain real property components (the 5-, 7-, and 15-year buckets in MACRS). Section 1250 applies to real property (27.5-year residential and 39-year nonresidential). The rate cap differs: Section 1245 recapture is taxed at ordinary income rates, while unrecaptured Section 1250 gain is capped at 25%.
Does holding longer reduce recapture?: Holding longer does not reduce the recapture portion. Accumulated depreciation is what is recaptured, and that amount continues to grow each year you own the property. Holding longer can convert more of the appreciation portion of the gain into LTCG, but the recapture portion remains fixed by depreciation taken.
Can NIIT push recapture above ordinary rates?: Yes. NIIT adds 3.8% on top of Section 1245 recapture, unrecaptured 1250 gain, and LTCG for taxpayers over the income threshold. A high-income taxpayer not REPS-qualified can face 37% plus 3.8% equals 40.8% on Section 1245 recapture.
Does a 1031 exchange eliminate recapture?: No. A 1031 exchange defers recapture into the replacement property's basis. The deferred amount remains owed to the IRS and is paid when the replacement property is sold in a fully taxable disposition. Only an estate basis step-up under IRC Section 1014 at the owner's death eliminates the deferred recapture.
How does a basis step-up at death erase recapture?: IRC Section 1014 generally sets the heir's basis equal to the fair market value at the decedent's date of death. The accumulated depreciation, the deferred 1031 recapture, and any cost segregation acceleration are all reset to zero from the heir's perspective. The heir can sell immediately with no recapture exposure on the pre-death depreciation.
Should I avoid cost segregation because of recapture?: For most investors, no. The time value of accelerated deductions, especially under 100% bonus depreciation under OBBBA, materially exceeds the recapture cost at disposition for any holding period of three years or more, and the recapture is deferred via 1031 or eliminated via Section 1014 in most exit scenarios. Investors who plan to sell quickly and pay tax in full are the exception.
Does Section 469(g) help with recapture?: Yes, when applicable. Under Section 469(g), a fully taxable disposition of an entire activity releases all suspended passive losses against any income, including recapture income. Investors who accumulated suspended losses during ownership can offset recapture income at disposition, partially or fully neutralizing the tax.
What about installment sales?: Section 1245 recapture is generally recognized in the year of sale even on an installment sale under IRC Section 453(i), not pro-rated across the installment payments. Unrecaptured 1250 gain follows the installment method. This rule frequently surprises sellers and reduces the cash-flow benefit of installment treatment.
Does depreciation recapture apply to partial dispositions?: Yes. A partial disposition election under Treas. Reg. 1.168(i)-8 allows you to write off the remaining basis of a component when it is replaced (e.g., a roof). The component's accumulated depreciation is recaptured at the partial disposition. The new component starts fresh.
How does state tax affect recapture?: Most states tax recapture at the state's ordinary income rate. There is no state equivalent of the federal 25% unrecaptured 1250 cap in most states. State-level conformity to federal recapture rules is generally clean (recapture is rarely the area where states decouple from federal), but the rate stack can push the all-in marginal cost on recapture into the 40-50% range in high-tax states.

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About the author

Zawwad Ul Sami, Founder

Zawwad Ul Sami is the founder of WeCostSeg, a founder-led cost segregation firm serving real estate investors across the US. He focuses on strategy, pricing, and the firm's overall direction.