Depreciation Recapture Calculator

Selling a rental property triggers a four-layer federal tax stack — §1245 ordinary recapture, §1250 unrecaptured gain (max 25%), long-term capital gains (0/15/20%), and NIIT (3.8%). This calculator builds that stack from your property details, accounts for cost segregation if you did one, applies any suspended passive loss carryforwards, and shows your net after-tax proceeds.

The four-layer tax stack on a rental sale

Layer 1: §1245 ordinary recapture (cost segregation)

If you did a cost segregation study, some of your building basis was reclassified into 5-year or 7-year personal property (appliances, carpeting, fixtures, specialty systems). These were depreciated at accelerated rates — often fully in year one via bonus depreciation. When you sell, any gain up to the amount of these deductions is taxed as ordinary income at your full marginal rate (up to 37%). This is §1245 recapture — it is not capped at 25% the way structural depreciation is.

Layer 2: §1250 unrecaptured gain

Straight-line depreciation on the building structure (27.5-year residential, 39-year commercial) creates §1250 unrecaptured gain. The IRS taxes this portion of your gain at a maximum rate of 25% — lower than ordinary income, but higher than regular long-term capital gains. Most investors are surprised to find that even "nothing changed" after 10 years means tens of thousands at 25%.

Layer 3: Long-term capital gain (LTCG)

Any gain above the recapture layers is taxed at long-term capital gains rates — 0%, 15%, or 20% depending on your income. For 2026: the 0% rate applies up to $49,450 (single) / $98,900 (MFJ) of total taxable income; 20% kicks in above $545,500 (single) / $613,700 (MFJ). Your other income stacks below the gain in the brackets, so high-income investors often pay 20% on the LTCG layer.

Layer 4: Net Investment Income Tax (3.8%)

The 3.8% NIIT (IRC §1411) applies to investment income — including rental gains — when MAGI exceeds $200K (single) or $250K (MFJ). These thresholds are not indexed for inflation and haven't changed since 2013. The NIIT stacks on top of all three layers above. Real estate professionals who qualify for REPS and materially participate can potentially exclude rental income from NIIT under Treas. Reg. §1.1411-4(g)(7), but this requires meeting the 500-hour safe harbor or one of the general material participation tests.

Suspended passive losses: the forgotten tax shield

Many rental investors have accumulated suspended passive activity losses (PALs) — deductions that couldn't be used in prior years because rental income was insufficient or the $25K allowance phased out. These carryforwards are locked up until you dispose of the property.

When you sell in a fully taxable transaction, §469(g)(1) releases all suspended PALs. They first offset any gain from the sale, then flow through as ordinary deductions against other income. An investor with $150K of suspended PALs selling a property with $200K of taxable gain might reduce that gain to $50K — a dramatic difference in tax owed.

A 1031 exchange does NOT release suspended PALs — they carry over to the replacement property. If you have large carryforwards, selling outright may produce less tax than you expect. Model both scenarios before deciding.

When the math favors selling over a 1031

• Large suspended PAL carryforward that will offset most of the taxable gain
• 0% LTCG bracket in the year of sale — income under $98,900 MFJ means LTCG is tax-free
• Near step-up window — heirs will soon inherit and get basis erased at death
• Poor replacement property options — a forced 1031 into a bad deal costs more than the tax
• Desire to exit real estate entirely — 1031 requires rolling into more real estate

1. IRC § 1245 — Gain from dispositions of certain depreciable property; ordinary income recapture on personal property (Cornell LII)
2. IRC § 1(h)(1)(D) — Unrecaptured §1250 gain taxed at maximum 25% rate (Cornell LII)
3. IRC § 1411 — Net Investment Income Tax; 3.8% surtax, thresholds $200K single/$250K MFJ, not indexed for inflation (Cornell LII)
4. IRC § 469(g) — Suspended passive activity loss carryforwards released in full on complete disposition of the passive activity (Cornell LII)
5. IRS Rev. Proc. 2025-61 — 2026 inflation adjustments: LTCG 0% bracket ≤$49,450 single/$98,900 MFJ; 20% bracket above $545,500 single/$613,700 MFJ (IRS.gov)
6. IRS Topic No. 703 — Basis of Assets; "allowed or allowable" depreciation rule reduces basis regardless of whether deductions were claimed (IRS.gov)

Tax values verified as of May 2026. §1250 unrecaptured gain max rate: 25% per IRC §1(h)(1)(D). §1245 ordinary recapture: ordinary income rate up to 37%. LTCG brackets: IRS Rev. Proc. 2025-61. NIIT 3.8%: IRC §1411, thresholds not indexed. PAL carryforward release: IRC §469(g)(1).