Depreciation Recapture Calculator

About depreciation recapture

When you own a rental property, the IRS lets you deduct a slice of the building's value each year as depreciation, a paper expense that reflects wear and tear. Those deductions lower your taxable rental income year after year, and they also reduce your cost basis in the property. Depreciation recapture is the tax you owe when you sell: the IRS "recaptures" the benefit of all that accumulated depreciation by taxing it, separately from the appreciation in the property's value.

This calculator splits your total tax bill into two pieces. The depreciation you claimed over the years is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25 percent. Any gain above your original purchase price, the actual appreciation, is taxed at the lower long-term capital gains rate. The tool shows total depreciation taken, the recapture tax, the capital gains tax, and your net proceeds so you can see the real after-tax result of a sale before you commit to one.

Landlords use it to plan the timing of a sale, to weigh a straight sale against a 1031 exchange, and to avoid the nasty surprise of a five-figure tax bill that many first-time sellers do not see coming.

How the tax is calculated

The calculation runs in two stages, recapture first, then capital gains on what is left:

Total depreciation = Purchase price x Annual rate x Years held
Adjusted basis     = Purchase price - Total depreciation
Total gain         = Sale price - Adjusted basis
Recapture tax      = min(Total depreciation, gain) x 25%
Capital gains tax  = (Gain above original basis) x cap-gains rate
Total tax          = Recapture tax + Capital gains tax

• Annual rate is about 3.636 percent for residential property (27.5-year straight line) or 2.564 percent for commercial (39 years).
• Adjusted basis falls every year you depreciate, which is why depreciation increases your eventual gain.
• The 25 percent is a maximum federal rate on the depreciation portion (Section 1250); your actual rate can be lower if your bracket is below 25 percent.

Worked example

You bought a rental for 250,000 dollars, held it 10 years depreciating at 2.5 percent per year, and sold for 400,000 dollars.

1. Total depreciation: 250,000 x 2.5 percent x 10 = 62,500 dollars.
2. Adjusted basis: 250,000 - 62,500 = 187,500 dollars.
3. Total gain: 400,000 - 187,500 = 212,500 dollars.
4. Recapture tax: 62,500 x 25 percent = 15,625 dollars.
5. Capital gains: the 150,000 dollars of appreciation above the 250,000 basis at 20 percent = 30,000 dollars.

Depreciation schedules and rates

Key figures behind real-estate depreciation recapture in the US.

Common pitfalls

• Depreciating the land. Only the building depreciates, not the land underneath. Split the purchase price first or you overstate depreciation and the recapture.
• Skipping depreciation to dodge recapture. The IRS taxes depreciation "allowed or allowable," so you owe recapture on what you could have claimed even if you never did.
• Forgetting state tax and NIIT. The 25 percent is federal only; many states tax the gain too, and high earners face the extra 3.8 percent net investment income tax.
• Assuming the whole gain is recaptured at 25 percent. Only the depreciation portion gets the 25 percent rate; appreciation above your original basis is taxed at the lower capital gains rate.
• Overlooking the 1031 option. A like-kind exchange can defer both taxes; missing the strict 45-day and 180-day deadlines forfeits that deferral.

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