The Ultimate Depreciation Recapture Calculator (2024)

Last updated on June 23rd, 2021 at 05:45 pm

Depreciation recapture calculator | How depreciation recapture works | Depreciation recapture tax rates | How to avoid depreciation recapture | Depreciation recapture example | Depreciation recapture FAQs

Depreciation recapture, a provision the IRS uses to tax the profitable sale of a rental property on which the owner has previously claimed depreciation, can have a great impact on an investor’s bottom line.

To determine the amount you’ll be taxed on your depreciation recapture, use our depreciation recapture tax calculator. All you need to do is input basic information like your property’s purchase and sale prices, how long you’ve owned it, and how much annual depreciation you claimed.

Crunch your numbers below with the depreciation tax calculator, or skip ahead for a deeper dive into the details of depreciation recapture.

Depreciation Recapture Calculator

Plug in the basic information requested for each field to learn how much you’ll owe without deferring your gains.

How does depreciation recapture work?

It’s hard to explain depreciation recapture without touching on depreciation itself, so let’s start there.

As you probably know, depreciation is a tax deduction that reflects the costs of owning and improving a property. The IRS considers the “useful life” of a rental property to be 27.5 years, so the amount of depreciation you can claim each year is your property’s value divided by 27.5.

This is a coveted tax deduction because depreciation isn’t a real cash expense. But since it reduces your tax rate, it effectively improves your cash flow.

However, it’s not a free ride. By taking depreciation, you’re essentially telling the IRS that your property is worth less and less each year. If you sell the property for more than you bought it for, the IRS is going to feel like you’ve gotten a free tax write-off, and it’ll want to recapture — or tax — some of that depreciation.

Investors often dread depreciation recapture tax because it’s a tax on savings they’ve enjoyed in the past, not on money they’ve recently made.

Depreciation recapture tax rates

Since depreciation recapture is taxed as ordinary income as opposed to capital gains, your depreciation recapture tax rate is going to be your income tax rate, with a cap at 25%.

This 25% cap was instituted in 2013. Previously, the cap was 15%.

Your depreciation recapture tax rate will break down like this:Shortcode

Remember, your depreciation recapture tax rate is determined by what income tax bracket you’re in.

To learn more about the taxes you’ll potentially face and to chart a path forward, consult with an experienced expert. Contact us today and we’ll put you in touch with a seasoned qualified intermediary.

How to avoid depreciation recapture

The most effective way to avoid depreciation recapture is to use a 1031 exchange.

A 1031 exchange allows you to avoid depreciation recapture for the same reason it allows you to avoid capital gains taxes. In the eyes of the IRS, you’re trading the property, not selling it. Therefore, there’s no financial gain to tax.

In reality, avoiding tax means you’re only delaying your tax bill, not eliminating it. But since there’s no limit on how many times you can use a 1031 exchange, many investors use them to defer depreciation recapture indefinitely.

» LEARN MORE: Read How to Avoid Depreciation Recapture Tax on Rental Property

Depreciation recapture example

Let’s look at an example to illustrate depreciation recapture in the real world.

An investor buys a duplex for $500,000 building value. (It’s “building value” because land can’t be depreciated.)

The investor takes $30,000 depreciation each year for ten years. Total amount of depreciation taken: $300,000. That means the property’s adjusted cost basis is $200,000 — the purchase price minus the total depreciation taken.

After some time the investor sells the duplex for $750,000. The investor’s realized gain: $550,000 — the sale price minus the purchase price.

So how are taxes assessed on that realized gain? Well, this is where depreciation recapture comes up. Since this investor claimed a total of $300,000 in depreciation over the years, $300,000 of their realized gain gets taxed at the depreciation recapture rate, which is capped at 25%.

The remaining $250,000 of the realized gain gets taxed at the investor’s capital gains tax rate of 20%.

In this scenario, the investor pays $75,000 in depreciation recapture (25% of $300,000), and $50,000 in capital gains taxes (20% of $250,000).

While most investors are more concerned about capital gains, this example shows how depreciation recapture can account for much more of an investor’s tax bill than capital gains.

That’s the power — and the pain — of depreciation recapture.

🤙 GET 1031 EXCHANGE ASSISTANCE: To learn more about using a 1031 exchange to help address potential depreciation recapture, consult with an experienced expert. Contact us today.

Depreciation Recapture FAQs

Let’s answer some of the most common questions about depreciation recapture.

Can I avoid depreciation recapture on rental property taxes by moving into my rental property?

You can delay them with this strategy, but you can’t avoid them indefinitely.

Also keep in mind that while you’re able to do a 1031 exchange with a property you lived in, only the non-qualifying use portion of your ownership — the years you didn’t not live in the property, and used it as a rental — is eligible for tax deferral.

What is Section 1250 depreciation recapture?

Section 1250 is a provision in the IRS code that taxes previously recognized depreciation as income instead of long-term capital gains.

Let’s say you bought an investment property and sold it after a decade for a nice profit. Once you calculate your cost basis, the net gain from the sale will be split up into unrecaptured 1250 gains (the amount of depreciation you claimed during your ownership), and conventional capital gains. Those two portions will be taxed at different rates.

Will I owe depreciation recapture on my primary residence?

You won’t owe depreciation recapture on your primary residence — unless you took deductions on it as a home office.

How is depreciation calculated?

The most common method of calculated depreciation — the General Depreciation System — spreads depreciation equally over a term of 27.5 years for residential buildings.

To calculate your depreciation, divide your property value by 27.5, and you get the amount of depreciation you’re allowed to claim each year.

For commercial buildings, the term is 39 years.

Will I owe depreciation recapture on rental property if it’s gifted?


While gifting a property confers some tax advantages, any depreciation claimed on that property will still be subject to recapture when it’s sold, since the adjusted cost basis is unchanged.

What is bonus depreciation recapture?

Bonus depreciation is a temporary tax provision (currently scheduled to phase out by 2027) that lets you speed up the depreciation you could claim over the life of a property. You can claim more of it now.

If you claim bonus depreciation on a property, and then sell it for a gain, that bonus depreciation will be taxed as ordinary income, and not capital gains. That’s bonus depreciation recapture.

Is bonus depreciation subject to recapture?

Yes. While bonus depreciation has become a popular tool for real estate investors, especially since it applies to both new and used property, it’s definitely subject to recapture.

However, there are ways to avoid bonus depreciation recapture. You can reclassify your property as personal property, and then use the section 179 exclusion. Or you can use a 1031 exchange to defer depreciation recapture taxes.

Read more about these strategies, and others, in our article about bonus depreciation recapture.

The Ultimate Depreciation Recapture Calculator (2024)


Is depreciation recapture always 25%? ›

Depreciation Recapture tax is 25% across the board, only second to real estate owned less than one year, taxed as ordinary income which could be as high as 37%. Learn more about depreciation recapture tax in this article. The gradual reduction in value of an asset over time.

How do I get out of paying depreciation recapture? ›

If it's important to you to avoid the depreciation recapture tax, there are several strategies you may want to adopt.
  1. Take advantage of IRS Section 121 exclusion. ...
  2. Conduct a 1031 exchange. ...
  3. Pass on the property to your heirs. ...
  4. Sell the property at a loss.
Jul 16, 2023

What is the depreciation recapture tax rate for 2023? ›

So part of the gain beyond the original cost basis would be taxed as a capital gain but the part that relates to depreciation is taxed at the 1250 rule rate. The unrecaptured section 1250 rate is capped at 25% for 2023.

What is the maximum depreciation recapture rate? ›

Depreciation recapture on non-real estate property is taxed at the taxpayer's ordinary income tax rate. Depreciation recapture on gains specific to real estate property, on the other hand, is capped at a maximum of 25%.

How does IRS calculate depreciation recapture? ›

How to Calculate Depreciation Recapture
  1. 1.) First, calculate the adjusted tax basis: ...
  2. 2.) Calculate the realized gain: ...
  3. 3.) The depreciation recapture value is the amount of depreciation taken multiplied by a 25% rate: ...
  4. 4.) The remaining gain is taxed at the capital gains rate of 0%, 15%, or 20%:
Mar 19, 2023

What happens when you sell a fully depreciated rental property? ›

Depreciation is recaptured and taxed when a rental property is sold. Depreciation recapture tax is based on an investor's federal income tax bracket, up to a maximum of 25%. The impact of depreciation recapture tax can be minimized with a 1031 tax-deferred exchange or an installment sale.

Can I avoid depreciation recapture? ›

One of the best ways is to use a 1031 exchange, which references Section 1031 of the IRS tax code. This may help you avoid depreciation recapture and any capital gains taxes that might apply.

What triggers depreciation recapture? ›

Depreciation recapture is triggered when you sell a rental property for a gain. If you lose money in the deal, you won't have to pay back any of your depreciation deductions. If you netted a gain, though, you'll have to pay taxes on the accumulated depreciation at your nominal tax rate, with a cap of 25 percent.

What is the formula for depreciation recapture? ›

To determine the depreciation recapture, subtract the adjusted cost basis from the sale price for the asset.

What are the new depreciation rules for 2023? ›

The rules allow Bonus Depreciation to 100% for all qualified purchases made between September 27, 2017 and January 1, 2023. Bonus Depreciation now ramps down to 80%, starting in 2023. Bonus depreciation will continue to ramp down for ensuing years: 60% for 2024, 40% for 2025, 20% for 2026, and 0% beginning in 2027.

How is depreciation recapture taxed on rental property? ›

In 2019, depreciation recapture on gains related to the sale of the property was capped at a maximum of 25%. The rest will be taxed at the long-term capital gains rate according to your income level. If you're a higher-income taxpayer, you may also be on the hook for a 3.8% net investment income tax.

What is the one time capital gains exemption for 2023? ›

For the 2023 tax year, you are not subject to capital gains taxes if your taxable income is $44,625 or less ($89,250 if married and filing jointly). If it's $44,626–$492,300 as a single filer, or $89,251–$553,850 if married and filing jointly, you would pay 15 percent on the $250,000 profit.

Do you pay both capital gains and depreciation recapture? ›

The total depreciation expense taken to reduce taxable net income is “recaptured” by the IRS and taxed at the investor's ordinary income tax rate, up to a maximum tax rate of 25%. Any remaining additional profit is taxed as a capital gain at the rate of 0%, 15%, or 20%, depending on the investor's federal tax bracket.

What is the 50% depreciation rule? ›

Section 179 allows taxpayers to recognize depreciation expense on qualifying property when its used more than 50% of the time for business. It allows business owners to deduct a set dollar amount of new business assets that have been put in place during the current tax year.

What is the maximum recapture tax? ›

The maximum recapture tax is either 50% of the gain on sale or 6.25% of the original loan amount, whichever is less. For more information regarding this provision, please contact the IRS or a tax professional.

Is there always depreciation recapture? ›

At this point, you may be wondering if you can avoid dealing with rental property depreciation recapture simply by not claiming depreciation in the first place. Unfortunately, the answer is no. Internal Revenue Code Section 1250 states that depreciation must be recaptured if depreciation was allowed or allowable.

Is 15 year property subject to recapture? ›

This means that these four types of 19-year (or 18- or 15-year) ACRS real property and low-income housing that have specifically defined as subject to recapture under Section 1250, and that all other ACRS real property is subject to recapture under Section 1245.

What is the 27.5 year depreciation rule? ›

If you own a rental property, the federal government allows you to claim the depreciation of the property every year for 27.5 years. If you use the property for business or farming for more than 1 year, you can deduct the depreciation on your tax return over a longer period of time.

What assets are subject to 1250 recapture? ›

An unrecaptured section 1250 gain is an income tax provision designed to recapture the portion of a gain related to previously used depreciation allowances. It is only applicable to the sale of depreciable real estate.

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