Depreciation Recapture 2026: Section 1245, Section 1250, and How to Calculate What You Owe

Published: February 19, 2026 Tax Year: 2026

A Message from Slava

Depreciation is one of the most powerful tax deductions available to business owners — you deduct the cost of an asset over its useful life, reducing your taxable income each year. But here's the part nobody mentions until it's too late: when you sell that asset, the IRS wants some of that tax benefit back.

At Anna Money, where we served over 60,000 small businesses, I saw this pattern constantly. A business owner would buy equipment, deduct it through Section 179 or regular depreciation, and then sell it a few years later — only to discover a surprise tax bill called "depreciation recapture."

When I started Jupid, I wanted to make sure our users understood these tax consequences before they happened, not after. Depreciation recapture isn't complicated once you understand the rules, but the surprise factor is what gets people. If you claimed $30,000 in depreciation on a vehicle and sell it for $20,000, you don't just get a $20,000 gain — you may owe ordinary income tax on the depreciation you previously deducted.

This guide covers exactly how depreciation recapture works, the difference between Section 1245 and Section 1250 property, how to report it on Form 4797, and strategies to reduce or defer the tax hit.

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Executive Summary: Depreciation Recapture for 2026

What is depreciation recapture? When you sell a depreciated business asset for more than its adjusted basis (cost minus accumulated depreciation), the IRS "recaptures" some or all of the depreciation you claimed by taxing it — often at ordinary income tax rates instead of the lower capital gains rates.

2026 Key Numbers:

Tax savings example: You purchased equipment for $50,000, claimed $50,000 in Section 179 depreciation, and sold it 3 years later for $20,000.

Original cost: $50,000
Depreciation claimed: $50,000 (Section 179)
Adjusted basis: $0

Sale price: $20,000
Gain: $20,000 - $0 = $20,000

Depreciation recapture (Section 1245): $20,000 taxed as ordinary income
Tax at 24% bracket: $4,800

Without understanding recapture, you might assume selling equipment for less than you paid means no tax. Instead, you owe $4,800.

Legal basis: IRC §1245 (personal property recapture), IRC §1250 (real property recapture), IRC §1231 (Section 1231 gain/loss), IRS Publication 544

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How Depreciation Recapture Works

The Basic Concept

When you buy a business asset, you reduce your taxable income by deducting its cost through depreciation. This is a legitimate tax benefit — but it's not permanent. The IRS views depreciation as a temporary tax deferral, not a tax elimination.

When you sell the asset, the IRS wants to recapture some of that benefit. Here's the logic:

1. You buy a machine for $40,000
2. Over 5 years, you depreciate it to $0, saving roughly $8,000-$14,800 in taxes (depending on your bracket)
3. You sell the machine for $15,000
4. The IRS says: "You claimed $40,000 in deductions, but the machine was worth $15,000 when you sold it — so you over-deducted by $15,000"
5. That $15,000 is taxed as ordinary income (depreciation recapture)

Adjusted Basis: The Key Number

Your adjusted basis is the original cost minus all depreciation claimed (or allowed, even if you didn't claim it). This is the number that determines your gain or loss.

Adjusted basis = Original cost - Accumulated depreciation

Example:
  Original cost: $60,000
  Depreciation claimed over 4 years: $45,000
  Adjusted basis: $60,000 - $45,000 = $15,000

If you sell for more than the adjusted basis, you have a gain. If you sell for less, you have a loss. Depreciation recapture applies only when there is a gain.

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Section 1245 Recapture: Personal Property

What Is Section 1245 Property?

Section 1245 property includes depreciable personal property (not real estate). Common examples:

• Office equipment — computers, printers, desks, chairs
• Vehicles — cars, trucks, vans used for business
• Machinery — manufacturing equipment, tools
• Software — purchased business software
• Certain improvements — tenant improvements, leasehold improvements
• Livestock — horses, cattle (if depreciable)
• Patents and copyrights — if purchased

How Section 1245 Recapture Works

Section 1245 recapture is straightforward and punishing: all depreciation is recaptured as ordinary income, up to the amount of the gain.

Section 1245 recapture = Lesser of:
  (a) Total depreciation claimed, OR
  (b) Total gain on the sale

Any gain above the depreciation claimed = Section 1231 gain (capital gains rates)

Example 1: Equipment Sale (Gain Less Than Depreciation)

Asset: CNC machine
Original cost: $80,000
Depreciation claimed: $80,000 (fully depreciated)
Adjusted basis: $0

Sale price: $25,000

Gain: $25,000 - $0 = $25,000
Depreciation recapture: $25,000 (all ordinary income — because gain < depreciation)
Section 1231 gain: $0

Tax at 24% bracket: $25,000 × 24% = $6,000

Example 2: Equipment Sale (Gain Exceeds Depreciation)

Asset: Specialized equipment
Original cost: $50,000
Depreciation claimed: $30,000
Adjusted basis: $20,000

Sale price: $65,000

Gain: $65,000 - $20,000 = $45,000
Depreciation recapture: $30,000 (ordinary income — limited to depreciation claimed)
Section 1231 gain: $15,000 (capital gains rates — the excess above depreciation)

Tax at 24% bracket (recapture): $30,000 × 24% = $7,200
Tax at 15% LTCG rate (1231 gain): $15,000 × 15% = $2,250
Total tax: $9,450

Section 179 and Bonus Depreciation Recapture

If you claimed a Section 179 deduction or bonus depreciation, the recapture rules are the same — the full deduction is treated as depreciation for recapture purposes.

This is where surprises happen. You buy a $60,000 truck, deduct the entire cost through Section 179 in Year 1, and sell it for $35,000 in Year 3. Your adjusted basis is $0, so the entire $35,000 sale price is a gain — and all of it is recaptured as ordinary income.

Truck purchase: $60,000
Section 179 deduction (Year 1): $60,000
Adjusted basis: $0

Sale price (Year 3): $35,000
Gain: $35,000
Depreciation recapture: $35,000 (ordinary income)

Tax at 24% bracket: $8,400

Many business owners don't realize they'll owe $8,400 in tax when they sell a truck they originally paid $60,000 for and sold at a $25,000 "loss." There's no loss for tax purposes — the Section 179 deduction already gave you the full tax benefit upfront.

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Section 1250 Recapture: Real Property

What Is Section 1250 Property?

Section 1250 property is depreciable real property — buildings and structural components. Examples:

• Commercial buildings — offices, warehouses, retail spaces
• Residential rental property — apartment buildings, rental houses
• Structural components — HVAC systems, elevators, electrical wiring (when part of a building)
• Land improvements — parking lots, fences, sidewalks (these may be Section 1245 in some cases)

Note: Land itself is never depreciable and is not subject to recapture.

How Section 1250 Recapture Works

Section 1250 recapture is different from Section 1245 in two important ways:

1. Only "additional depreciation" is recaptured as ordinary income — this is depreciation above what straight-line would have allowed
2. Straight-line depreciation is recaptured at a maximum 25% rate (called "unrecaptured Section 1250 gain")

Since most real property placed in service after 1986 uses straight-line depreciation (27.5 years for residential, 39 years for commercial), the Section 1250 ordinary income recapture is usually $0. Instead, you deal with the "unrecaptured Section 1250 gain" — which is still a form of recapture, just at a lower rate.

Unrecaptured Section 1250 Gain

When you sell depreciated real property at a gain, the gain is split into two parts:

Part 1: Unrecaptured Section 1250 gain
  = Lesser of (total straight-line depreciation, total gain)
  Taxed at: maximum 25%

Part 2: Remaining gain above depreciation
  = Total gain - unrecaptured Section 1250 gain
  Taxed at: 0%, 15%, or 20% (long-term capital gains rates)

Example 3: Commercial Building Sale

Asset: Office building (land excluded)
Original cost: $500,000
Depreciation method: Straight-line over 39 years
Years held: 10 years
Depreciation claimed: $500,000 ÷ 39 × 10 = $128,205
Adjusted basis: $500,000 - $128,205 = $371,795

Sale price (building portion): $600,000

Total gain: $600,000 - $371,795 = $228,205

Unrecaptured Section 1250 gain: $128,205 (taxed at max 25%)
Remaining gain: $228,205 - $128,205 = $100,000 (taxed at 15% LTCG rate)

Tax on recapture: $128,205 × 25% = $32,051
Tax on remaining gain: $100,000 × 15% = $15,000
Total tax: $47,051

Compare this to straight capital gains treatment on the full amount:

$228,205 × 15% = $34,231

The depreciation recapture adds $12,820 to your tax bill — the difference between 25% and 15% on the $128,205 of depreciation.

Example 4: Residential Rental Property Sale

Asset: Rental house
Original cost (building only): $300,000
Depreciation method: Straight-line over 27.5 years
Years held: 8 years
Depreciation claimed: $300,000 ÷ 27.5 × 8 = $87,273
Adjusted basis: $300,000 - $87,273 = $212,727

Sale price (building portion): $350,000

Total gain: $350,000 - $212,727 = $137,273

Unrecaptured Section 1250 gain: $87,273 (taxed at max 25%)
Remaining gain: $137,273 - $87,273 = $50,000 (taxed at 15% LTCG rate)

Tax on recapture: $87,273 × 25% = $21,818
Tax on remaining gain: $50,000 × 15% = $7,500
Net Investment Income Tax (3.8%): $137,273 × 3.8% = $5,216
Total tax: $34,534

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Section 1245 vs. Section 1250: Side-by-Side Comparison

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Reporting Depreciation Recapture on Form 4797

Form 4797 (Sales of Business Property) is where you report the sale of depreciable business assets. The form has three parts, and you'll typically use Parts I and III.

Part III: Gain From Disposition of Property

This is where depreciation recapture is calculated.

For Section 1245 property:

1. Enter the property description, date acquired, date sold, and sale price
2. Enter the cost or other basis
3. Enter the depreciation claimed
4. Calculate the gain (sale price - adjusted basis)
5. The lesser of gain or depreciation = ordinary income from recapture

For Section 1250 property:

1. Same identification information
2. Calculate "additional depreciation" (amount above straight-line)
3. The lesser of additional depreciation or gain = ordinary income
4. Remaining gain flows to Part I (as Section 1231 gain)

Part I: Sales or Exchanges of Property Used in Trade or Business

Section 1231 gains and losses are netted here. If the result is a net gain, it's treated as a long-term capital gain (favorable rates). If a net loss, it's treated as an ordinary loss (deductible against ordinary income).

Where Each Amount Goes on Your 1040

Depreciation recapture (ordinary income) → Form 4797, Part III → Form 1040, Line 7
Section 1231 gain → Form 4797, Part I → Schedule D → Form 1040
Unrecaptured Section 1250 gain → Schedule D, Line 19 → 28% Rate Gain Worksheet

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Strategies to Minimize Depreciation Recapture

Strategy 1: 1031 Like-Kind Exchange (IRC §1031)

A 1031 exchange lets you defer depreciation recapture by exchanging one investment or business property for a similar ("like-kind") property. The rules:

• Applies to real property only (after 2017, personal property no longer qualifies)
• Must identify replacement property within 45 days
• Must close on replacement property within 180 days
• Must use a qualified intermediary — you can't touch the sale proceeds

Example: You sell a rental property with $100,000 of unrecaptured Section 1250 gain. Instead of paying $25,000 in recapture tax, you buy another rental property through a 1031 exchange. The $25,000 in tax is deferred until you sell the replacement property (or deferred indefinitely if you continue exchanging).

Limitation: 1031 exchanges don't work for Section 1245 property (equipment, vehicles, etc.) — only for real property held for investment or business use.

Strategy 2: Installment Sale (IRC §453)

Spreading the sale over multiple years through an installment sale can reduce the tax impact by:

• Keeping you in lower tax brackets each year
• Deferring a portion of the recapture tax
• Spreading the cash flow impact

Important caveat: For Section 1245 property, depreciation recapture is recognized in full in the year of sale, even in an installment sale. Only the Section 1231 gain can be spread over the installment period.

For Section 1250 property (real estate), both the recapture and the remaining gain can be spread over the installment period.

Strategy 3: Opportunity Zone Investment (IRC §1400Z)

If you invest the gain from a property sale into a Qualified Opportunity Zone Fund within 180 days, you can defer capital gains tax. However, depreciation recapture recognized as ordinary income cannot be deferred through Opportunity Zones — only the capital gain portion qualifies.

Strategy 4: Charitable Donation

Donating appreciated property to a qualified charity avoids depreciation recapture entirely. You receive a charitable deduction equal to the fair market value (for property held more than one year), and neither you nor the charity pays recapture tax.

Limitations:

• Charitable deductions are limited to 30% of AGI for appreciated capital gain property
• The property must be donated to a public charity (not a private foundation, which uses cost basis)
• You lose the sale proceeds — this only makes sense if you planned to make a significant donation anyway

Strategy 5: Hold Until Death (Step-Up in Basis)

When a taxpayer dies, their heirs receive a "stepped-up" basis equal to the property's fair market value at the date of death (IRC §1014). This eliminates all accumulated depreciation and all potential recapture.

Example: You own equipment with a $0 adjusted basis ($100,000 original cost, fully depreciated). At death, it's worth $40,000. Your heirs inherit it with a $40,000 basis — the $100,000 in depreciation recapture disappears permanently.

This isn't a practical "strategy" for most situations, but it's relevant for estate planning — especially for real estate held long-term.

Strategy 6: Offset With Capital Losses

Section 1231 gains can be offset by capital losses. If you have capital losses from stock sales or other investments, they can offset the Section 1231 portion of your gain. However, depreciation recapture taxed as ordinary income cannot be offset by capital losses — it can only be offset by ordinary deductions.

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Interaction With Section 179 and Bonus Depreciation

Section 179 Recapture

When you claim a Section 179 deduction, the full amount is treated as depreciation for recapture purposes. In 2026, the Section 179 limit is $1,320,000.

Key point: Section 179 gives you an immediate deduction, but if you sell the asset before it would have been fully depreciated under regular MACRS, the recapture can be significant.

Example:
  Equipment cost: $100,000
  Section 179 deduction (Year 1): $100,000
  MACRS depreciation that would have been claimed (Years 1-3): $55,000

  If you sell in Year 3 for $30,000:
    Adjusted basis: $0
    Gain: $30,000
    All $30,000 is Section 1245 recapture (ordinary income)

Bonus Depreciation Recapture

Bonus depreciation works the same way for recapture — the full amount of bonus depreciation claimed is treated as depreciation subject to recapture. For 2026, bonus depreciation is 60% (down from 80% in 2024 and 100% for assets placed in service before 2023).

Example:
  Equipment cost: $80,000
  Bonus depreciation (60%): $48,000
  Regular MACRS (Year 1, remaining $32,000): $6,400
  Total Year 1 depreciation: $54,400
  Adjusted basis after Year 1: $25,600

  If you sell in Year 2 for $50,000:
    Gain: $50,000 - $25,600 = $24,400 (after Year 2 MACRS)
    Section 1245 recapture: full $24,400 as ordinary income

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Common Mistakes to Avoid

Mistake 1: Forgetting About Recapture When Selling Business Assets

Problem: Selling equipment, vehicles, or property without accounting for depreciation recapture in your tax planning.

Impact: A surprise tax bill at ordinary income rates. Selling a fully depreciated vehicle for $15,000 means $15,000 of ordinary income — potentially $3,600-$5,550 in unexpected tax.

Solution: Before selling any depreciated asset, calculate the adjusted basis and potential recapture. Factor the tax cost into your decision about whether and when to sell. Use the depreciation calculator to see your current basis.

Mistake 2: Claiming "Allowed or Allowable" Depreciation

Problem: Not claiming depreciation deductions, then assuming no recapture applies when you sell.

Impact: The IRS recaptures depreciation that was allowable — not just what you actually claimed. If you were entitled to $50,000 in depreciation deductions but never claimed them, the IRS still treats your adjusted basis as if you did (IRC §1016(a)(2)).

Solution: Always claim depreciation you're entitled to. If you haven't been claiming it, file amended returns (if within the statute of limitations) or file Form 3115 to change your accounting method and catch up.

Mistake 3: Confusing Section 1245 and Section 1250

Problem: Applying Section 1250 rates (25% max) to personal property that should be classified as Section 1245 (ordinary income rates).

Impact: Underpayment of tax. The IRS can assess additional tax plus accuracy penalties.

Solution: Section 1245 = personal property and certain improvements. Section 1250 = buildings and structural components. When in doubt, check IRS Publication 544 or consult a tax professional.

Mistake 4: Not Filing Form 4797

Problem: Reporting the sale of business property on Schedule D instead of Form 4797, or not reporting it at all.

Impact: Incorrect tax treatment and potential IRS notices. The AUR system matches asset sales reported by buyers against your return.

Solution: All sales of depreciable business property must be reported on Form 4797. Section 1231 gains then flow to Schedule D. Get both forms right.

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How Jupid Helps You Track Depreciation and Plan for Recapture

Depreciation recapture catches people off guard because they lose track of their adjusted basis — the number that determines how much tax they owe when they sell. Jupid prevents this.

Automatic transaction categorization. When you buy business equipment, Jupid categorizes it with 95.9% accuracy and flags it as a potential depreciable asset. No more lost receipts or forgotten purchases.

Real-time basis tracking. Jupid maintains your adjusted basis as depreciation accrues, so you always know the tax consequences of selling an asset.

Tax impact estimates. Thinking about selling that work truck or upgrading your equipment? Jupid shows you the estimated recapture tax before you make the decision — so there are no surprises at tax time.

AI accountant on WhatsApp and iMessage. "What's my tax basis on the equipment I bought in 2024?" — ask Jupid's AI and get the answer instantly, along with the estimated tax if you sell at a given price.

Depreciation deductions are valuable, but they come with strings attached. Start tracking your assets and tax basis with Jupid.

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Action Checklist

• List all depreciable business assets you own (equipment, vehicles, buildings)
• Calculate the adjusted basis for each asset (cost minus accumulated depreciation)
• Identify any assets you plan to sell in 2026
• Calculate potential depreciation recapture and tax liability before selling
• Determine whether each asset is Section 1245 or Section 1250 property
• Consider a 1031 exchange for real property to defer recapture
• Check if installment sale treatment would reduce your overall tax rate
• If you haven't been claiming depreciation, file Form 3115 to catch up
• Keep Form 4797 requirements in mind when reporting any business property sale
• Consult a tax professional before selling high-value depreciated assets

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Resources and Citations

• IRC §1245 — Gain From Dispositions of Certain Depreciable Property
• IRC §1250 — Gain From Dispositions of Certain Depreciable Realty
• IRC §1231 — Property Used in the Trade or Business
• IRS Publication 544 — Sales and Other Dispositions of Assets
• IRS Form 4797 — Sales of Business Property
• IRS Form 4797 Instructions
• IRC §179 — Election to Expense Certain Depreciable Business Assets
• IRC §1031 — Like-Kind Exchanges
• IRC §453 — Installment Method
• IRC §1016(a)(2) — Adjustments to Basis (Depreciation Allowed or Allowable)
• IRC §1014 — Basis of Property Acquired From a Decedent

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Final Thoughts

Depreciation is a tax deferral, not a tax elimination. Every dollar you deduct through depreciation, Section 179, or bonus depreciation becomes a dollar of potential recapture when you sell the asset. Know your adjusted basis, understand whether your property falls under Section 1245 or 1250, and plan the timing of asset sales around your overall tax picture. The tax hit is real, but with proper planning, it doesn't have to be a surprise.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws change frequently; consult a qualified tax professional for advice specific to your situation. Tax Year: 2026. Last Updated: February 2026.