Quick Answer
The 25% depreciation recapture rate is a special federal tax rate that applies to all depreciation claimed on real estate when you sell. It's higher than most long-term capital gains rates (0%, 15%, 20%) but lower than ordinary income rates (up to 37% in 2026).
Best Answer
Robert Kim, Tax Return Analyst
Best for people who converted their primary residence to rental property and are now selling
Understanding the 25% depreciation recapture rate
The 25% depreciation recapture rate is a special federal tax rate that applies specifically to the portion of your gain from selling real estate that represents depreciation you claimed (or could have claimed) during ownership. This rate sits between the preferential long-term capital gains rates and ordinary income tax rates.
How the 25% rate compares to other tax rates
For 2026 tax year, here's how the 25% recapture rate compares:
Why 25% specifically?
The 25% rate was established by Congress as a compromise — it's higher than capital gains rates (since depreciation deductions reduced your ordinary income at higher rates) but lower than full ordinary income rates (providing some tax benefit for real estate investment).
Example: Former primary residence converted to rental
Let's say you bought your home for $300,000 in 2018, lived in it for 3 years, then converted it to rental property in 2021. You sell it in 2026 for $450,000:
Depreciation calculation:
Tax calculation on sale:
Since this was your primary residence for 2 of the last 5 years, you can exclude $250,000 of the capital gains portion (but not the recapture):
Rate comparison table
Important exceptions to the 25% rate
State tax considerations
Most states that have income tax will also tax depreciation recapture, typically at their ordinary income rates. This can add 3-13% to your total tax bill depending on your state.
High-tax state example (California):
Planning strategies around the 25% rate
What you should do
Before selling depreciated real estate, calculate your recapture tax using the 25% rate (or your marginal rate if lower). This helps you price the sale appropriately and consider tax-deferral strategies.
Use our refund estimator to model different scenarios and our return scanner to verify the total depreciation you've claimed over the years.
Key takeaway: The 25% depreciation recapture rate applies to all claimed depreciation on real estate sales — it's often higher than capital gains rates but can be deferred through strategic planning like 1031 exchanges.
*Sources: [IRS Section 1(h)(1)(D)](https://www.law.cornell.edu/uscode/text/26/1), [IRS Publication 544](https://www.irs.gov/pub/irs-pdf/p544.pdf)*
Key Takeaway: The 25% depreciation recapture rate applies to all claimed depreciation on real estate sales — it's often higher than capital gains rates but can be deferred through strategic planning like 1031 exchanges.
2026 Tax rates comparison for different types of investment gains
| Tax Type | Rate Range | Applies To |
|---|---|---|
| Long-term capital gains | 0%, 15%, 20% | Stocks, bonds, real estate appreciation |
| Depreciation recapture | 25% (flat rate) | Real estate depreciation claimed |
| Section 1245 recapture | 10% - 37% | Equipment, personal property depreciation |
| Ordinary income | 10% - 37% | Wages, business income, short-term gains |
| Net Investment Income Tax | 3.8% | High-income taxpayers (additional) |
More Perspectives
Michelle Woodard, Tax Policy Analyst
Best for investors with multiple properties seeking to optimize their tax strategy
Strategic implications of the 25% rate for investors
For real estate investors, the 25% depreciation recapture rate significantly impacts portfolio strategy and exit planning. Unlike capital gains, which can be offset by losses, depreciation recapture is unavoidable when you sell.
Rate arbitrage opportunities
The fixed 25% rate creates planning opportunities when your marginal tax rate fluctuates:
High-income years: If you're in the 32% or 37% bracket, paying 25% recapture may be better than continuing to depreciate at higher rates
Low-income years: If you're temporarily in the 12% or 22% bracket, recapture at 25% becomes more expensive than your ordinary rate
Commercial vs. residential property
The 25% rate applies differently depending on property type:
Multi-generational planning
The 25% rate makes the "step-up in basis" at death particularly valuable for real estate. Heirs receive property at fair market value, eliminating accumulated depreciation recapture entirely.
Estate planning consideration:
Advanced strategies
Opportunity Zones: Rolling depreciation recapture into Qualified Opportunity Zone investments can defer and potentially reduce recapture taxes
Delaware Statutory Trusts: For 1031 exchanges, DSTs can help manage recapture across multiple investors
Key takeaway: The fixed 25% recapture rate creates both constraints and opportunities for real estate investors — sophisticated planning can minimize its impact while building long-term wealth.
Key Takeaway: The fixed 25% recapture rate creates both constraints and opportunities for real estate investors — sophisticated planning can minimize its impact while building long-term wealth.
Robert Kim, Tax Return Analyst
Best for heirs who inherited rental property and want to understand their tax situation
How the 25% rate affects inherited property
When you inherit rental property, you generally receive a "stepped-up basis" equal to the property's fair market value at the date of death. This eliminates the depreciation recapture that the deceased owner would have faced.
The step-up advantage
This is one of the most powerful tax benefits in the code:
Example:
Exception: Depreciation after inheritance
While you avoid recapture on pre-death depreciation, any depreciation you claim after inheriting the property will be subject to 25% recapture when you sell.
Post-inheritance scenario:
Timing considerations for heirs
If you plan to sell inherited rental property, consider:
1. Immediate sale: No depreciation recapture, just capital gains on appreciation since death
2. Hold and depreciate: Build up new recapture liability but gain rental income and tax deductions
3. 1031 exchange: Can defer taxes while building real estate portfolio
State law variations
Some states don't provide full step-up in basis, which can affect your depreciation recapture calculation. Always consult local tax professionals for inherited property.
Key takeaway: Inherited rental property gets a "free pass" on the deceased owner's depreciation recapture, but any depreciation you claim as heir will face the 25% rate when you sell.
Key Takeaway: Inherited rental property gets a "free pass" on the deceased owner's depreciation recapture, but any depreciation you claim as heir will face the 25% rate when you sell.
Sources
- IRS Section 1(h)(1)(D) — Tax rates on net capital gain including unrecaptured section 1250 gain
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Section 1250 — Gain from dispositions of certain depreciable realty
Related Questions
Reviewed by Robert Kim, Tax Return Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.