Depreciation Recapture on a Property Sale: See What You Will Owe
Owners of rental and investment property often focus on the capital gains rate and forget depreciation recapture. Years of depreciation lower your basis, and part of the gain can be taxed at higher rates when you sell.
The free depreciation recapture calculator (Section 1250, 1245 and NIIT) splits the gain into its pieces, shows the tax on each, and compares paying now with investing the deferrable part in an Opportunity Zone fund.
What you enter
Sale price, selling costs, original cost plus improvements, straight-line depreciation on the building, any depreciation on Section 1245 property (for example from a cost segregation study), your ordinary income and long-term capital gain brackets, your state, and whether the 3.8% NIIT applies.
How the gain is split
Section 1245 recapture
Taxed as ordinary income.
Unrecaptured Section 1250 gain
Taxed at a maximum of 25%.
Remaining Section 1231 or capital gain
Taxed at your long-term capital gain rate.
The tool then adds NIIT and state tax, and shows every step of the math: amount realized, adjusted basis, total gain, and the tax on each slice.
The Opportunity Zone comparison
Pick the years you would hold a QOF, an assumed annual return, and a rural or standard fund, and the tool compares that path with selling and paying now. It works only on the part of the gain that can be deferred.
Step by step: splitting your gain
- Open the rental property depreciation recapture calculator.
- Enter the sale price and selling costs.
- Enter original cost plus improvements.
- Enter straight-line depreciation on the building, and separately any Section 1245 depreciation from cost segregation.
- Choose your ordinary and capital gain brackets, your state, and whether NIIT applies.
- Read the split, then set the Opportunity Zone comparison (years, return, rural or standard fund).
Hypothetical example: the calculator's default sale
The tool loads with a sample sale you can replace. These are the tool's illustrative inputs, not a real property: a $2,000,000 sale with $100,000 of selling costs, a $1,200,000 cost basis, $300,000 of building depreciation and $100,000 of Section 1245 depreciation. The tool shows the math: amount realized of $1,900,000, adjusted basis of $800,000, and a total gain of $1,100,000. Of that, $100,000 is Section 1245 recapture, $300,000 is unrecaptured Section 1250 gain, and $700,000 is remaining Section 1231 or capital gain. Each slice is taxed differently, which is the point of the tool.
Why sellers are surprised
Depreciation lowers your basis every year whether or not you think about it. When you sell, the gain is larger than the price minus what you paid, and part of it can be taxed above the long-term capital gain rate. Cost segregation speeds up deductions but can increase the ordinary income slice at sale.
Who uses it
- Owners of luxury rentals, short-term rental homes and small multifamily buildings.
- Agents preparing a seller net sheet for an investment property.
- Investors comparing a sale-and-pay path with a 1031 or a QOF.
Common mistakes
- Leaving out depreciation you were entitled to claim. Ask your CPA what figure to use.
- Mixing 1245 and 1250 depreciation into one number.
- Forgetting selling costs, which reduce the amount realized.
- Assuming all of the gain can go into a QOF. The tool compares the deferrable part only; ask your adviser what qualifies.
Questions to bring to your CPA or adviser
The tool gives you a starting point. Before you act, these are worth asking:
- What total depreciation was claimed, or allowable, on this property?
- Was any cost segregation done, and how much is Section 1245 property?
- Does the 3.8% NIIT apply to me on this sale?
- Which part of my gain could be deferred in a QOF, and which part could not?
- Would a 1031 exchange defer more of the total tax in my case?
- What are my state's rules on recapture and on OZ conformity?
- How should selling costs and improvements be documented for the return?
Where this fits for luxury sellers and buyers
Luxury rentals, furnished corporate units and short-term rental homes are often depreciated aggressively, sometimes with cost segregation. That can make the recapture slice of the bill larger than owners expect. Knowing the split before you list helps you set a realistic net and decide whether a 1031 or an Opportunity Zone fund makes sense.
More free Opportunity Zone tools
This is one of several free planning tools in the Opportunity Zone tools library on Opportunity Zone Invest. Then compare deferral paths with the 1031 vs DST vs Opportunity Zone calculator.
FAQ
What is unrecaptured Section 1250 gain?
The part of the gain tied to straight-line depreciation on real property. The tool applies a maximum 25% rate to it.
Does cost segregation change recapture?
Depreciation on Section 1245 property is recaptured as ordinary income, so it is entered separately.
Does the NIIT apply?
The tool lets you choose: generally on rental or investment property, not on a non-passive trade or business.
Not tax advice. Tool outputs are estimates based on the figures you enter and current published rules. Investors get Opportunity Zone tax benefits only by investing through a Qualified Opportunity Fund. Talk to a CPA or tax attorney before you act.