What this line means
The portion of your gain on depreciable real property that represents depreciation you previously claimed (or should have claimed). This gain is taxed at a maximum rate of 25% — higher than the standard long-term capital gains rate of 15% or 20%, but lower than ordinary income rates. This applies primarily to rental property and commercial real estate.
Does this apply to you?
- You sold rental property on which you claimed depreciation deductions
- You sold commercial real estate that was depreciated
- You received unrecaptured Section 1250 gain reported on a K-1 from a partnership or S corporation that sold depreciable real property
- You sold a property where you were required to claim depreciation even if you did not
Easy to overlook
Depreciation you should have claimed counts against you Even if you never actually deducted depreciation on your rental property, the IRS treats you as if you did. The “allowed or allowable” rule means the recapture calculation uses the depreciation you were entitled to take, not what you actually took. Not claiming depreciation does not save you from recapture. 1 General filing pattern — depreciation recapture on rental property sales
The 25% rate applies only to the depreciation portion The total gain on a property sale has two layers: the depreciation recapture (taxed at up to 25%) and the remaining appreciation (taxed at the standard 0%/15%/20% long-term rate). Only the amount of gain equal to the accumulated depreciation is subject to the 25% rate. The rest benefits from lower rates. 2 IRS Schedule D instructions — Unrecaptured Section 1250 Gain Worksheet
Watch out for this
Not reporting depreciation recapture at all when selling a rental property. Many rental property owners report the sale as a simple long-term capital gain on Form 8949, paying the 15% or 20% rate on the entire gain. The IRS expects the depreciation portion to be taxed at 25%, and the omission shows up when the IRS cross-references your prior Schedule E depreciation deductions.
Footnotes
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IRS Schedule D (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩
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IRS Schedule D (Form 1040) Instructions, Unrecaptured Section 1250 Gain Worksheet. https://www.irs.gov/instructions/i1040sd ↩