What Is Section 1250 Depreciation Recapture on Real Property?
Depreciation is one of the more valuable deductions available to owners of business or rental real estate, but it comes with a catch that shows up later: some of that benefit gets clawed back when the property is eventually sold. For real estate specifically, that clawback works differently than it does for other kinds of business property, which trips people up more often than it should.
The short answer
When real property used in a business or rental is sold for a gain, the portion of that gain tied to depreciation already claimed is subject to recapture. For real estate specifically, that recaptured amount is generally taxed at a separate, capped rate rather than being folded in fully as ordinary income, which is how depreciation recapture on equipment, vehicles, or other personal property typically works instead.
Why real estate gets its own recapture treatment
Depreciation recapture rules aren’t uniform across every type of depreciable asset. Personal property, meaning tangible business assets other than real estate, generally has its recapture taxed as ordinary income up to the full amount of depreciation claimed. Real property is treated more gently: the recaptured amount sits in its own category, taxed at a rate that’s capped below ordinary income rates but still generally higher than the rate that applies to the rest of a long-term capital gain. It occupies a middle tier between the two.
What counts toward the recaptured amount
The recapture calculation generally looks at the total depreciation claimed on the property over the years it was owned, not just an accelerated portion of it. That amount becomes the ceiling on how much of the eventual gain gets pulled into the recapture category, with any gain beyond that treated as ordinary long-term capital gain. This applies whether the sale happens as a single lump-sum transaction or is structured as an installment sale, since the recapture piece is generally recognized in the year of sale either way, regardless of how the rest of the proceeds are collected over time.
How this shows up when the property is finally sold
At sale, the total gain effectively splits into pieces for tax purposes: the recapture piece, taxed at its own capped rate, and the remaining appreciation piece, taxed at standard capital gains rates. Because both pieces are calculated from the same sale, the seller’s overall tax bill depends on how much of the total gain is attributable to depreciation already claimed versus genuine price appreciation over the holding period. A property that’s been heavily depreciated relative to its price growth will have a larger share of its gain pulled into the recapture bucket.
What to weigh
Section 1250 recapture is a reminder that depreciation deductions aren’t free forever, they’re more like a deferral that gets partially reversed at sale. Because the rate that applies to the recaptured portion, and the calculations involved, are specific to each property’s depreciation history, it’s worth working through the actual numbers on a given property rather than assuming the entire gain will be taxed at ordinary capital gains rates. Any suspended losses tied to the property also tend to resolve in that same sale year, which is worth factoring into the bigger picture.