Is There Depreciation Recapture When I Sell My Rental? (Section 1250)

Published August 10, 2026

Selling a rental after years of depreciation deductions triggers unrecaptured section 1250 gain, taxed at up to 25 percent instead of the usual capital gains rate. Here is how the math works and what a partial 1031 exchange changes.

The short answer

Yes. When you sell a rental for more than its depreciated basis, the portion of your gain equal to depreciation you deducted is "unrecaptured section 1250 gain" and is taxed at a maximum 25 percent federal rate under 26 U.S.C. section 1(h)(1)(E), not the lower 15 or 20 percent long-term capital gains rate. A partial 1031 exchange defers the gain you don't recognize, but any recapture tied to boot you actually receive is still due, and the rest carries into the replacement property.

Last verified: August 10, 2026

Why your rental sale isn't taxed like a stock sale

A rental building is section 1250 property. Every year you own it, you deduct depreciation, which lowers your basis and, in most cases, lowers your taxable rental income. When you sell, the IRS collects some of that benefit back.

That "some of it back" mechanism has two layers, and landlords routinely conflate them.

Layer one: section 1250 recapture as ordinary income. For most residential rental property depreciated using straight-line MACRS since 1987, actual section 1250 recapture as ordinary income is usually zero, because straight-line depreciation doesn't generate the "additional depreciation" (accelerated depreciation in excess of straight-line) that section 1250(a) recaptures. If you used an accelerated method or the property predates current rules, this layer can apply.

Layer two: unrecaptured section 1250 gain, taxed at 25 percent. This is the layer that actually hits nearly every landlord who sells. It is defined in 26 U.S.C. section 1(h)(6) as the long-term capital gain that would have been ordinary income if all depreciation, not just the accelerated portion, had been subject to recapture. In plain terms: it is your total straight-line depreciation, capped at your actual gain, taxed at up to 25 percent instead of the standard capital gains rate.

Working the number

Say you bought a rental for $500,000, allocated $400,000 to the depreciable building, and took $100,000 of straight-line depreciation over the years you owned it. Your adjusted basis is $400,000. You sell for $650,000.

| Item | Amount |

|---|---|

| Sale price | $650,000 |

| Adjusted basis | $400,000 |

| Total gain | $250,000 |

| Unrecaptured section 1250 gain (capped at depreciation taken) | $100,000, taxed at up to 25 percent |

| Remaining gain taxed at standard long-term capital gains rate | $150,000, taxed at 0, 15, or 20 percent depending on your income |

Under 26 U.S.C. section 1(h)(1)(E), the tax on the unrecaptured section 1250 gain applies to the lesser of that amount or your net capital gain, and it stacks on top of your ordinary income before the capital gains brackets are applied. According to IRS Tax Topic 409, the maximum rate on this category is 25 percent regardless of how high your ordinary income bracket runs.

How a partial 1031 exchange changes the answer

A full like-kind exchange under section 1031 defers all of your gain, including the depreciation-recapture layer, as long as you reinvest all proceeds into replacement real property of equal or greater value with no cash or non-like-kind property taken out.

Most exchanges aren't full and clean. You take some cash out, get debt relief you don't replace, or receive property that isn't like-kind. That's "boot," and boot triggers recognized gain.

Treasury Regulation section 1.1250-3(d), the special rule for like-kind exchanges and involuntary conversions, controls what happens to the recapture layer specifically. The rule limits the section 1250 gain you must take into account to the amount actually recognized in the exchange. If your exchange qualifies for full nonrecognition, no section 1250 recapture is triggered on your return for that transaction. If boot forces you to recognize some gain, recapture is triggered only up to that recognized amount, not your full potential recapture.

Whatever recapture doesn't get triggered doesn't disappear. It becomes built-in "additional depreciation" carried forward and attached to the replacement property, so it resurfaces when you eventually sell that property outright without another exchange.

Practically, that means a South Bay landlord who exchanges out of a fully depreciated rental into a larger property, taking a modest amount of cash out at closing, will owe unrecaptured section 1250 gain tax on the cash boot received, roughly up to the amount of recapture that boot represents, while the balance of the recapture rides along into the new property's basis.

What actually determines your rate

Two separate things decide what you owe: how much of your gain is unrecaptured section 1250 gain, and where your total taxable income lands for the year of sale. The 25 percent figure is a ceiling, not a flat rate. If your ordinary income plus gain keeps you in a lower bracket, the effective rate on that layer can be lower. State tax (California has no separate capital gains rate, it taxes the gain as ordinary income at up to 13.3 percent) stacks on top and is a separate calculation entirely.

FAQ

Does unrecaptured section 1250 gain apply if I only ever used straight-line depreciation?

Yes. Unrecaptured section 1250 gain, defined in 26 U.S.C. section 1(h)(6), is based on the depreciation you actually deducted, not on whether you used an accelerated method. Straight-line depreciation on residential rental property is the normal case for this tax, not the exception.

Is unrecaptured section 1250 gain the same as depreciation recapture?

They overlap but aren't identical. Section 1250(a) ordinary-income recapture applies only to depreciation in excess of straight-line, which is rare on post-1986 residential rentals. Unrecaptured section 1250 gain under section 1(h)(6) is the broader, more common tax and applies to straight-line depreciation too, just at the 25 percent capital gains rate instead of as ordinary income.

Can a full 1031 exchange eliminate this tax entirely?

Yes, for the transaction itself, if the exchange qualifies for full nonrecognition under section 1031 and you take no boot. The recapture is deferred, not forgiven. It attaches to the replacement property's basis under Treasury Regulation section 1.1250-3(d)(5) and comes due when you eventually sell without exchanging again.

Does 1250 recapture apply to my personal residence?

No. These rules apply to depreciable rental or business real property. A personal residence generally isn't depreciated and has its own gain exclusion rules under section 121, which are outside the scope of this article.

Where does this show up on my tax return?

Unrecaptured section 1250 gain is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions and flows into your capital gains calculation. A partial 1031 exchange is reported on Form 8824.

This is general information, not tax advice. Confirm your specific depreciation history, basis, and exchange structure with a CPA or tax attorney before you sell or exchange a rental property.

Topics: taxes, depreciation recapture, section 1250, capital gains, 1031 exchange

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