Compute depreciation recapture + capital gains tax at sale of rental property.
Total tax at sale
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Recapture tax (25%)
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LTCG on appreciation
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Your breakdown
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The deduction you loved comes due at the closing table
Every year you owned that rental, depreciation handed you a paper deduction that sheltered some of your rent from tax. The IRS lets you write off the building (not the land) over 27.5 years for residential property under the modified accelerated cost recovery system. When you sell, the agency wants a piece of that benefit back. The mechanism is depreciation recapture, governed for real property by Section 1250, and it is taxed at a maximum rate of 25%, which is its own special category sitting between the long-term capital gains rates and ordinary income. This calculator separates your sale gain into the recapture slice and the true appreciation slice, then taxes each correctly.
Here is the subtlety that trips people up: recapture applies even if you never claimed the depreciation. The code says "allowed or allowable," meaning the IRS computes recapture on the depreciation you should have taken, whether or not you actually deducted it. Skipping depreciation to dodge recapture simply forfeits the deduction without avoiding the tax, the worst of both worlds.
Splitting the gain into two taxable layers
The tool first rebuilds your adjusted basis by subtracting accumulated depreciation from your original cost. The total gain is the sale price minus that lower adjusted basis. Then it carves the gain in two: the portion up to your accumulated depreciation is recaptured at 25%, and anything above that, the genuine appreciation, is taxed at your long-term capital gains rate.
Selling a rental for $600,000
Say you bought a rental for $300,000, claimed $80,000 of depreciation over the years, and sell for $600,000. Your long-term capital gains rate is 20%. The bill breaks out as follows.
Of the $380,000 gain, $80,000 is recaptured depreciation taxed at 25% and the remaining $300,000 is appreciation taxed at 20%. The two-tone bar below shows how the gain divides before tax.
Three ways investors soften the hit
The tax above is not inevitable. A Section 1031 like-kind exchange defers both the recapture and the capital gain when you roll the proceeds into another investment property within the strict 45-day identification and 180-day closing windows. Holding the property until death gives heirs a stepped-up basis that can erase the unrealized gain entirely. And high earners should remember that the 3.8% Net Investment Income Tax can apply on top of these figures once modified adjusted gross income crosses $200,000 single or $250,000 married filing jointly, an amount this calculator does not include. Plan the sale year deliberately, because bunching a large gain into a single year can also push your capital gains into the 20% bracket.
Who should use this calculator?
Landlords and real estate investors planning the sale of a rental or other depreciable property who want a clear estimate before they list. It is a federal estimate and assumes straight-line residential depreciation, so investors with cost-segregation studies or commercial 1250 property should treat it as a starting point and confirm with their CPA.
Why is recapture taxed at 25% instead of my long-term rate?
Because the depreciation deductions you took reduced ordinary income taxed at rates often above 25%, Congress set the recapture rate as a compromise. It claws back the benefit at up to 25% rather than at full ordinary rates, while still being higher than the 15% or 20% applied to pure appreciation. The exact recapture rate is capped at 25% but can be lower if your overall income would tax it less.
Does the home sale exclusion help with a rental?
The Section 121 exclusion of up to $250,000 single or $500,000 married applies to a primary residence, not a pure rental. If you converted a former home into a rental, part of the gain may still qualify, but depreciation claimed after May 6, 1997 must still be recaptured and cannot be excluded. The exclusion never shelters recapture.