Depreciation Recapture
The IRS process of taxing the gain on a sold depreciable asset as ordinary income, to the extent of prior depreciation deductions taken.
What is Depreciation Recapture?
Depreciation recapture occurs when a taxpayer sells a depreciable asset for more than its adjusted tax basis (original cost minus accumulated depreciation). The IRS 'recaptures' previously claimed depreciation deductions by taxing that portion of the gain as ordinary income rather than capital gains. For personal property (Section 1245 assets), the full amount of depreciation taken is subject to recapture at ordinary income rates — up to 37% in 2026. For real property (Section 1250 buildings), the recaptured amount is taxed at a maximum rate of 25% (the unrecaptured Section 1250 gain rate). Any gain above the recapture amount is taxed as capital gains. Depreciation recapture is a critical consideration when selling investment property, equipment, or rental real estate.
Example
An investor buys rental property for $300,000 and takes $50,000 in straight-line depreciation over 5 years, reducing the tax basis to $250,000. The property sells for $350,000. The first $50,000 of gain (the recaptured depreciation) is taxed at the 25% unrecaptured Section 1250 rate = $12,500 tax. The remaining $50,000 gain above original cost is taxed at the long-term capital gains rate.
Source: IRS Publication 544 — Sales and Other Dispositions of Assets