What this line means
A 25% tax rate applied to the portion of your gain on the sale of depreciable real property that is attributable to depreciation you previously claimed. When you sell a rental property or other depreciable real estate at a gain, the IRS “recaptures” the depreciation deductions you took over the years by taxing that portion at 25% instead of the lower long-term capital gains rate. You calculate this using the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions.
Does this apply to you?
- You sold rental property on which you claimed depreciation deductions
- You sold commercial real estate or other depreciable real property at a gain
- You received a Schedule K-1 from a partnership or S corporation that sold depreciable real property
- You had a Section 1231 gain that includes depreciation recapture on real property
Easy to overlook
Depreciation you were required to take counts even if you did not claim it The IRS calculates depreciation recapture based on “allowed or allowable” depreciation. 1 If you owned a rental property for ten years and never claimed a depreciation deduction, the IRS still recaptures as if you had. Failing to claim depreciation does not protect you from recapture — it means you missed tax deductions for years and still owe the recapture tax when you sell. IRS Schedule D Instructions — Unrecaptured Section 1250 Gain
The 25% rate applies only to the depreciation portion, not the entire gain If you bought a rental property for $200,000, claimed $50,000 in depreciation over the years, and sold it for $300,000, your total gain is $150,000 (sale price minus adjusted basis of $150,000). 2 The first $50,000 (the depreciation recapture) is taxed at up to 25%. The remaining $100,000 of gain is taxed at your regular long-term capital gains rate (0%, 15%, or 20%). Filers who see “25% tax” sometimes assume it applies to the entire gain. General filing pattern — depreciation recapture missed on rental property sale
Watch out for this
Overlooking depreciation recapture when calculating the tax on a profitable property sale. Many rental property owners focus on the capital gains rate and forget that the depreciation they deducted over the years is recaptured at the higher 25% rate. This can add thousands of dollars to the tax on a property sale that the seller did not budget for.
Footnotes
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IRS Schedule D (Form 1040) Instructions, Unrecaptured Section 1250 Gain Worksheet. https://www.irs.gov/instructions/i1040sd ↩
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IRS Publication 544, Sales and Other Dispositions of Assets, Section 1250 Property. https://www.irs.gov/pub/irs-pdf/p544.pdf ↩