The short answer
Yes. Even when you qualify for the full exclusion, section 121(d)(6) keeps the gain equal to depreciation for periods after May 6, 1997 taxable, and that slice is unrecaptured section 1250 gain taxed at your ordinary rate up to a 25% maximum. It is measured by depreciation allowed or allowable, so skipping the deduction does not avoid it. The one way to keep it untaxed in the year of sale is to exchange the property under section 1031, which Rev. Proc. 2005-14 lets you combine with the exclusion.
At a glance
| Rule | Exclusion does not apply to gain up to post-May 6, 1997 depreciation |
|---|---|
| Measured by | Depreciation allowed or allowable, claimed or not |
| Federal rate | Unrecaptured section 1250 gain, maximum 25% |
| Possible surtax | 3.8% NIIT above $250,000 joint or $200,000 single modified AGI |
| Cap | Never more than your actual gain |
| Where reported | Form 4797, flowing to Schedule D |
| Deferral route | A 1031 exchange may defer it under Rev. Proc. 2005-14 |
The exclusion stops exactly where your depreciation starts
Section 121(d)(6) says the exclusion 'shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments... attributable to periods after May 6, 1997'. Reg. section 1.121-1(d) repeats the rule.
The carve-out is the smaller of your gain and that depreciation. If you sell at a gain of $15,000 after taking $27,000 of depreciation, only $15,000 is taxable; the rule cannot create gain that does not exist.
This is separate from the question of how long you can rent the house and still exclude the rest. That timing rule is in how long you can rent out your former home before losing the exclusion.
Allowable means the tax is owed even if you never took the deduction
Section 1250(b)(3) defines depreciation adjustments as deductions 'allowed or allowable'. Publication 523 applies that to home sales: you cannot exclude 'any depreciation allowed or allowable as a deduction for periods after May 6, 1997'.
So a landlord who rented the house for three years and never claimed depreciation still has the slice carved out, without ever having had the deduction. The remedy for missed deductions, and what it does at sale, is covered in recapture on depreciation you never claimed and catching up depreciation before a sale.
Publication 523 notes that section 1250 taxes gain as ordinary income only to the extent of depreciation 'in excess of straight-line', so a building depreciated straight-line produces unrecaptured section 1250 gain rather than ordinary income. Appliances, carpet and other personal property can be different; see section 1245 recapture in real estate.
The slice is taxed at your ordinary rate, capped at 25%
IRS Topic 409 says the 'portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate'. In a lower bracket, the rate is your ordinary rate instead.
The 3.8% net investment income tax can apply on top once modified AGI passes $250,000 for joint filers or $200,000 for single filers. Those thresholds are not indexed.
Publication 523 has you report the depreciation on Form 4797 and carry the remaining taxable gain, if any, to Schedule D. The excluded part does not appear on your return at all unless you received a Form 1099-S.
Worked example: $27,000 of depreciation on a $277,000 gain
Hypothetical, round numbers; run your own numbers with your CPA. A single owner bought a house for $350,000, lived in it for four years, then rented it for three years and was allowed $27,000 of depreciation. She sells for $600,000. Adjusted basis is $323,000 and the gain is $277,000.
She meets the two-of-five-year test, so $250,000 is excluded. The $27,000 equal to depreciation is taxable whatever else happens, at up to 25%, or $6,750 at the cap, plus NIIT if her income is high enough. That pattern mirrors the Taylor example in Publication 523.
If her gain had been $300,000 instead, the extra $23,000 above the $250,000 cap would be long-term capital gain too, taxed at 0%, 15% or 20%. For 2026, the 15% bracket ends at $545,500 of taxable income for single filers under Rev. Proc. 2025-32.
A 1031 exchange is the only way to push the slice into the future
Rev. Proc. 2005-14, section 4.02(2), says the exclusion does not apply to post-1997 depreciation 'however, section 1031 may apply to such gain'. Exchange the former home for investment property and you can exclude the home gain and defer the depreciation in one transaction; the mechanics are in using the exclusion and a 1031 on the same property.
Whether it is worth it depends on scale. Deferring $6,750 of tax means reinvesting into property you must hold for investment, and if that property later becomes your home, section 121(d)(10) delays the exclusion for five years. For a few thousand dollars, paying the tax is often the simpler answer.
When the depreciation and the gain above the cap are large, an exchange into a Delaware Statutory Trust interest sized to the amount that needs reinvesting keeps the replacement passive. See does a 1031 defer depreciation recapture for what the deferral carries forward.
Related questions
I never claimed depreciation. Do I still owe recapture?
Yes. The carve-out uses depreciation allowed or allowable, so the gain equal to the depreciation you could have taken is still taxable. The fix for missed deductions is covered in catching up depreciation before a sale.
Does depreciation before May 7, 1997 count?
No. Section 121(d)(6) reaches only depreciation adjustments for periods after May 6, 1997.
Is it taxed at 25% no matter what?
No. Unrecaptured section 1250 gain is taxed at your ordinary rate with a 25% ceiling, so a seller in the 12% or 22% bracket pays that lower rate on it.
I used a home office. Is that recapture too?
Yes, the depreciation on an office inside the home is carved out the same way, though you do not have to split the rest of the gain; see the home-office portion of a house.
Does the exclusion still cover the rest if I rented for less than three years?
Generally yes, as long as you owned and lived there two of the five years before the sale; rental after you move out is not nonqualified use.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. Section 121, exclusion of gain from sale of principal residence
- Treas. Reg. Section 1.121-1, exclusion of gain
- 26 U.S.C. Section 1250, depreciation adjustments
- IRS, Publication 523 (2025), Selling Your Home
- IRS, Topic 409, capital gains and losses
- IRS, Net investment income tax
- IRS, Rev. Proc. 2025-32, 2026 inflation adjustments
- IRS, Rev. Proc. 2005-14, Internal Revenue Bulletin 2005-7