Depreciation Recapture — Glossary — IRS Depreciation Rules

Depreciation Recapture

The recharacterization of gain on disposition of depreciable property from capital gain to ordinary income (under IRC §1245) or to unrecaptured §1250 gain taxed at a maximum 25% rate (under IRC §1250). Recapture limits the long-term capital-gain treatment of depreciation previously deducted.

STATUTE BASIS · IRC §1245 · IRC §1250

In context

§1245 applies to most personal property — equipment, fixtures, the 5- and 7-year components reclassified through cost segregation. On sale, gain is recharacterized as ordinary income up to the full amount of depreciation previously claimed, then capital-gain treatment resumes above that.

§1250 applies to real property (residential rental, nonresidential, QIP). Because real property depreciates straight-line under MACRS, there is generally no “excess” depreciation to recapture as ordinary income. Instead, the depreciation previously claimed becomes “unrecaptured §1250 gain” taxed at the unrecaptured §1250 gain rate (currently a maximum of 25%) rather than the standard long-term capital gain rate.

Cost segregation increases §1245 recapture exposure (because reclassified components are §1245 property), but the time-value benefit of the accelerated deductions typically exceeds the recapture cost. A §1031 like-kind exchange of real property defers both §1245 and §1250 recapture.

See /recapture/ for the full topic hub.