Depreciation Recapture Calculator
Calculate Section 1245 and Section 1250 depreciation recapture when selling business property. Understand how depreciation reduces basis and creates taxable ordinary income upon sale.
Property Information
Basis Calculation
Original Basis:$100000.00
Less Depreciation:$30000.00
Adjusted Basis:$70000.00
Gain Breakdown
Total Gain:$80000.00
Capital Gain:$50000.00
Depreciation Recapture:$30000.00
Recapture Rate:25%
Depreciation Recapture Tax
$7500.00
Recapture taxed as ordinary income (Section 1245) or at special 25% rate (Section 1250 unrecaptured gain).
Capital Gains Tax:$7500.00
Total Tax on Sale:$15000.00
Section 1245 vs Section 1250
Section 1245 (Personal Property)
- Equipment, machinery, vehicles
- Furniture, fixtures
- Intangible assets (software, patents)
- ALL depreciation recaptured as ordinary income
- Max rate: your ordinary income bracket
Section 1250 (Real Property)
- Buildings, structural components
- Land improvements
- Only EXCESS depreciation recaptured
- Straight-line = NO recapture
- Unrecaptured gain taxed at 25% max
Depreciation Recapture Rules
- Recapture Definition: Depreciation claimed during ownership is "recaptured" and taxed as ordinary income when property sold at gain.
- Section 1245: Full depreciation recapture. Gain up to depreciation amount = ordinary income. Remaining = capital gain.
- Section 1250: Only accelerated depreciation over straight-line is recaptured. Straight-line depreciation creates unrecaptured Section 1250 gain (25% rate).
- Order of Taxation: 1) Recapture (ordinary income or 25%), 2) Unrecaptured 1250 gain (25%), 3) Remaining capital gain (15%/20%).
- No Loss Recapture: If sold at loss, no recapture. Loss calculated on adjusted basis.
- Like-Kind Exchange: Section 1031 exchange defers recapture. But recapture carries forward to new property.
- Installment Sale: Recapture taxed in year of sale (cannot spread). Capital gain can be spread.
- Property Conversion: Convert rental to personal use, then sell. Depreciation still recaptured.
Strategies to Minimize Recapture
- 1031 Like-Kind Exchange: Swap for similar property. Defer ALL gain including recapture. Must follow strict timeline (45 days identify, 180 days close).
- Installment Sale: Spread capital gain over years. Recapture still taxed year 1, but remaining gain deferred.
- Hold Longer: More depreciation = more recapture. But basis reduction helps if property appreciates significantly.
- Cost Segregation: Break building into components (1245 vs 1250). More 1245 = faster depreciation = more recapture risk.
- Sell at Loss: No recapture if total loss. But adjusted basis lower = larger loss deduction.
- Charitable Donation: Donate appreciated property. Avoid recapture AND get deduction at FMV (must hold more than 1 year).
Common Depreciation Recapture Mistakes
- Underestimating Tax: Many forget depreciation recapture. Surprise tax bill at ordinary rates vs expected 15% capital gains rate.
- Section 1250 Misunderstanding: Think NO recapture for buildings. Wrong - accelerated depreciation (pre-1987 methods) is recaptured.
- Cost Segregation Risk: Cost seg accelerates depreciation (good for cash flow). But creates more 1245 property = more recapture risk.
- 1031 Exchange Failure: Miss 45/180 day deadlines. Entire gain including recapture taxed immediately.
- Personal Use Conversion: Live in former rental for 2 years. Think Section 121 exclusion applies. WRONG - recapture still taxed.
- Form 4797 Required: Must file Form 4797 for depreciation recapture. Schedule D alone is incorrect.