Tax depreciation · Guide

Depreciation recapture: what happens to depreciation when you sell

Published Oct 24, 2026 By Smart Accounting

Every dollar of depreciation reduces your adjusted basisAdjusted basis. Original cost plus certain improvements, minus deductions such as depreciation allowed or allowable. Used to figure gain or loss when you sell. Glossary. When you sell, gain is the amount realized minus that adjusted basis, so past depreciation shows up again as gain. “Recapture” is the set of rules that decides how that part of the gain is taxed. Which rules apply depends on whether the asset is section 1245 propertySection 1245 property. Depreciable personal property such as equipment, furniture and vehicles. Gain on sale is taxed as ordinary income up to the depreciation taken. Glossary or section 1250 propertySection 1250 property. Depreciable real property, such as buildings, that is not section 1245 property. Glossary [Pub 544, ch. 3].

Equipment, vehicles and other section 1245 property

Section 1245 property is depreciable personal property (equipment, furniture, vehicles) plus some specialized structures. On a sale, the gain treated as ordinary income is the lesser of the depreciation and amortization allowed or allowable, or the gain realized. Any gain above that is section 1231 gain [Pub 544, ch. 3]. Depreciation for this purpose includes ordinary depreciation, any special (bonus) depreciation allowance, and the §179 deduction [Pub 544, ch. 3].

Example: equipment expensed with 100% bonus

You buy a $50,000 machine in 2025 and deduct all of it with 100% bonus depreciation. In 2027 you sell it for $30,000.

The whole gain is ordinary income, reported in Part III of Form 4797 [Pub 544, ch. 3].

Rental and commercial buildings: section 1250 property

Section 1250 property is depreciable real property that is not section 1245 property: buildings and their structural components [Pub 544, ch. 3]. Its gain is ordinary income only to the extent of “additional depreciation”, meaning depreciation above the straight-line amount. Residential rental and nonresidential real property placed in service after 1986 and depreciated under MACRS uses straight line, so if you held it more than a year (and, for qualified property, elected out of bonus depreciation) there is no additional depreciation [Pub 544, ch. 3].

That does not make the depreciation tax-free. The part of a long-term gain on section 1250 property that is due to depreciation is unrecaptured section 1250 gain [Pub 544, ch. 4]. You figure it on the Unrecaptured Section 1250 Gain Worksheet, and the Schedule D Tax Worksheet taxes it at no more than 25% [Sch. D instr., line 19; Schedule D Tax Worksheet, lines 35–40].

Example: selling a rental house

You bought a rental for $350,000 (building $280,000, land $70,000) and over the years took $60,000 of depreciation on the building. You sell for $420,000, ignoring selling costs for simplicity.

Real sales also involve selling costs, improvements and possibly passive-loss carryovers; the split between land and building also matters. Treat the table as the shape of the calculation, not your answer.

Recapture without a sale: business use drops

If you took a §179 deduction on property and its business use falls to 50% or less in a later year of its recovery period, you recapture part of the deduction [Form 4562 instr., column (i)]. Listed property, such as a vehicle, that falls to 50% or less business use is also subject to recapture of the excess of accelerated depreciation over what the Alternative Depreciation System would have allowed [Pub 946, ch. 5]. Both are figured on Form 4797 [Pub 544, ch. 4].

Keep the records

To figure recapture you need the date and manner of acquisition, cost or other basis, depreciation or amortization claimed, and every other basis adjustment [Pub 544, ch. 3]. The calculator’s CSV export is a reasonable start for the depreciation part.