Depreciation Recapture Tax Rate in 2026

Depreciation comes back in two layers, and the asset type decides which one

When you sell depreciated real estate at a gain, the part of the gain equal to the depreciation you took is taxed differently from the appreciation. The building and its structural components are section 1250 property under section 1250(c). Personal property inside it, such as appliances, carpet, furniture and the items a cost segregation study moves into 5-year and 7-year classes, is section 1245 property under section 1245(a)(3).

Section 1245 makes gain ordinary income up to all depreciation taken on that asset. Section 1250 makes gain ordinary only to the extent of additional depreciation, the excess over straight line, and section 168(b)(3) requires straight line for residential rental and nonresidential real property. Publication 544 confirms that a building placed in service after 1986 and held more than a year has no additional depreciation, provided no special depreciation allowance was claimed on it.

The building's straight-line depreciation is not left at capital gain rates either. Section 1(h)(6) defines unrecaptured section 1250 gain as the long-term gain that would be ordinary if section 1250 reached all depreciation, and section 1(h)(1)(E) taxes it at a maximum of 25%. For the component layer and the line between the two, see section 1245 recapture on real estate.

The 2026 brackets decide what each layer actually pays, and the 25% figure is only a ceiling

Recapture stacks on top of your other ordinary income and is taxed through the brackets. For 2026, Rev. Proc. 2025-32 sets the joint brackets at 10% to $24,800, 12% to $100,800, 22% to $211,400, 24% to $403,550, 32% to $512,450, 35% to $768,700 and 37% above. Single filers move from 24% to 32% at $201,775 and reach 37% above $640,600.

Section 1245 recapture is plain ordinary income, so the part that lands above $768,700 joint pays 37%. Unrecaptured section 1250 gain is taxed at the lower of your bracket rate or 25%, which means it is cheaper than 25% while it sits in the 22% or 24% bracket and is held at 25% once it reaches the 32% bracket. The appreciation layer then stacks above both at 0%, 15% or 20%, with 15% running to $613,700 joint and $545,500 single.

Section 1411 adds 3.8% to net investment income above $250,000 of modified AGI joint or $200,000 single, so a top-bracket seller's building depreciation can cost 28.8% and component depreciation 40.8%. The Form 8960 instructions carry the real estate professional exception for rental income and gain.

Worked example: a joint filer with both layers in a 2026 sale

Hypothetical, round figures. A married couple sells a rental building for a $600,000 gain. Of that, $40,000 is section 1245 recapture on cost-segregated fixtures, $300,000 is unrecaptured section 1250 gain from straight-line building depreciation, and $260,000 is appreciation. Their other taxable income is $150,000 and their AGI before the sale is $180,000.

The $40,000 of section 1245 income fills the 22% bracket from $150,000 to $190,000: $8,800. The $300,000 building layer runs from $190,000 to $490,000: $21,400 at 22% is $4,708, $192,150 at 24% is $46,116, and the $86,450 above $403,550 would be taxed at 32% but is held at 25%, $21,613. That layer totals $72,437, an average of 24.1%.

The $260,000 of appreciation stacks from $490,000: $123,700 at 15% to $613,700 is $18,555 and $136,300 at 20% is $27,260. NIIT is 3.8% of the lesser of the $600,000 gain or the $530,000 by which modified AGI of $780,000 exceeds $250,000, so $20,140. Federal tax is about $147,190, of which $81,237 is the recapture layers. Run your own numbers with your CPA.

Unclaimed depreciation, corporate owners and prior section 1231 losses can raise the bill

Recapture is measured on depreciation allowed or allowable, so an owner who never claimed depreciation still has it taken out of basis and recaptured at sale. Recapture on depreciation you never claimed explains the exposure, and a Form 3115 filed before the sale can still claim the missed deductions, as catching up missed depreciation sets out.

A C corporation has no 25% layer because the capital gain rates in section 1(h) apply to individuals. Instead, section 291(a)(1) treats 20% of the excess of what would be ordinary income under section 1245 over the section 1250 amount as ordinary income.

Section 1231(c) adds a third recapture: net section 1231 gain is ordinary income to the extent of net section 1231 losses deducted in the five preceding years. A seller who wrote off a loss on another property recently should expect part of this year's gain to come back at ordinary rates.

An exchange defers recapture, but boot and the replacement's mix of assets decide how much

Section 1031 defers gain on real property exchanged for like-kind real property, and section 1250(d)(4) limits any section 1250 ordinary recapture in an exchange to the greater of the gain recognized or the recapture amount in excess of the value of section 1250 property received, so a building-for-building exchange usually triggers none. Cash or debt relief you keep is boot, and the depreciation layers are taxed first; boot taxed as recapture or capital gain first shows the order.

Section 1245(b)(4) limits component recapture to the gain recognized plus the value of property received that is not section 1245 property. Because a plain building or a fractional interest in a traditional DST usually holds less section 1245 property than a cost-segregated building, part of that layer can be taxed even in a full exchange. Does a 1031 defer depreciation recapture works through the limits.