Unrecaptured Section 1250 Gain, in Plain English
There is a third capital gains rate almost nobody talks about. Everyone knows 0%, 15% and 20%. Fewer people know that a slice of a real estate sale gets taxed at 25%, and that slice is often the largest single line on the bill.
Buyer cash → Assignment Co. → A-rated carrier → You, on schedule
That slice is unrecaptured Section 1250 gain.
Where the odd name comes from
Section 1250 governs depreciation recapture on real property. It was written when buildings could be depreciated on accelerated schedules, and its job was to claw back the excess of accelerated depreciation over straight-line and tax it as ordinary income.
Then the 1986 Tax Reform Act required straight-line depreciation on essentially all buildings. With no accelerated portion left, there was nothing for the original §1250 rule to recapture on modern property.
So Congress created a separate bucket for the straight-line depreciation instead. It is "unrecaptured" precisely because §1250 itself doesn't recapture it as ordinary income. It gets its own maximum rate of 25%.
The name describes a piece of tax history rather than anything about your building, which is why it is so consistently misunderstood.
How it is calculated
Take the lesser of two numbers:
- The total straight-line depreciation you took, or were allowed to take, on the property.
- The total gain you actually realized on the sale.
That amount is unrecaptured Section 1250 gain, taxed at a maximum of 25%. Anything left over is ordinary long-term capital gain at 0%, 15% or 20%.
The second condition matters. If you sell at a loss relative to your original cost but still have gain because depreciation drove your basis down, your recapture is capped at the actual gain. You never owe recapture on more than you made.
A worked example
You bought a rental for $500,000 with $100,000 allocated to land. You depreciated the $400,000 building over 12 years at roughly $14,545 a year, so $174,545 of depreciation.
- Adjusted basis: $500,000 − $174,545 = $325,455
- Sale price: $800,000
- Total gain: $474,545
That gain splits:
If you had assumed one blended 15% rate across the whole $474,545, you'd have budgeted about $71,000. The actual federal bill is closer to $89,000 before the 3.8% net investment income tax and before state tax. On a California sale, add roughly 13.3%.
Run your own figures in the capital gains tax calculator, which separates the 25% bucket from the rest.
§1250 vs §1245: not the same thing
If you ran a cost segregation study, you moved dollars out of the 25% bucket and into the ordinary-income bucket. The deductions came faster and the recapture comes back harder. That trade can still be worth it, especially with a long hold or a 1031 exit, but it should be a decision rather than a surprise.
Three things that trip people up
It is not deferrable through an installment sale. IRC §453(i) requires recapture income in the year of sale. Spreading payments over ten years does not spread this piece.
It applies even if you never claimed the depreciation. The standard is "allowed or allowable." Not depreciating your rental does not protect you; it just means you paid for the deduction without receiving it.
A 1031 exchange carries it forward rather than erasing it. The unrecaptured gain follows into the replacement property. Take boot and it is recognized first, before capital gain.
Frequently asked
Q: What is the unrecaptured Section 1250 gain tax rate? A: A maximum of 25%. It is a ceiling, not a flat rate: if your ordinary bracket is below 25%, the gain is taxed at your lower rate.
Q: Where does it appear on my return? A: It is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions, and it flows through Schedule D. The sale itself is reported on Form 4797 and Form 8949.
Q: Does the Section 121 home sale exclusion cover it? A: No. If you rented out a home and later sold it, the $250,000/$500,000 exclusion does not shelter depreciation taken after May 6, 1997. That depreciation is still unrecaptured Section 1250 gain.
Q: Is unrecaptured Section 1250 gain the same as depreciation recapture? A: It is one of the two kinds. Depreciation recapture is the umbrella term; unrecaptured §1250 gain is the real-property piece taxed at 25%, and §1245 recapture is the personal-property piece taxed as ordinary income.
Run your specific numbers
The calculator runs your sale through real 2026 federal + state tax brackets and shows §453 savings vs lump sum side-by-side.
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