Depreciation Recapture Calculator

Section 1245 Recapture: Full Ordinary Income on Equipment Sales

Section 1245 of the Internal Revenue Code applies to personal property—machinery, equipment, vehicles, computers, and furniture—that has been depreciated for tax purposes. When you sell Section 1245 property for more than its adjusted basis (original cost minus accumulated depreciation), the gain up to the amount of depreciation previously claimed is recaptured as ordinary income, taxed at your marginal rate of up to 37%.

Example: You purchase a $50,000 CNC machine, claim $40,000 of depreciation over 5 years (MACRS), leaving an adjusted basis of $10,000. You sell it for $28,000. The entire $18,000 gain ($28,000 − $10,000) is Section 1245 recapture taxed as ordinary income—not capital gains. Even if you held the machine for 10 years, the favorable long-term capital gains rate does not apply to the recaptured portion. Only a gain above the original $50,000 cost would qualify for capital gains treatment, which rarely occurs with depreciating machinery.

Section 1250 Recapture and the 25% Unrecaptured Gain Rate

Section 1250 applies to real property (buildings and structural components). Under current rules—where MACRS straight-line is required for all real property—there is rarely any "excess accelerated depreciation" subject to Section 1250 recapture as ordinary income. However, the IRS still imposes a maximum 25% tax rate on "unrecaptured Section 1250 gain"—the total straight-line depreciation claimed on real property sold at a gain.

Consider a commercial building purchased for $800,000 (excluding land), depreciated over 39 years under MACRS. After 10 years, accumulated depreciation is $205,128. Adjusted basis: $594,872. Sale price: $900,000. Total gain: $305,128. Of this, $205,128 is unrecaptured Section 1250 gain taxed at max 25%, and $100,000 is ordinary long-term capital gain taxed at 0%, 15%, or 20%. Savvy investors in high brackets can owe $51,282 in federal tax on the recapture component alone—before adding net investment income tax.

Deferring Recapture Through a 1031 Exchange

A 1031 like-kind exchange allows real property owners to defer all gain recognition—including Section 1250 unrecaptured depreciation—by rolling proceeds into a replacement property of equal or greater value within 180 days. The deferred gain is not forgiven; it attaches to the replacement property's basis and will eventually be recognized when that property is sold without exchanging. Repeated 1031 exchanges can defer recapture indefinitely, and at death, heirs receive a stepped-up basis that eliminates the embedded gain entirely. Note that 1031 exchanges are not available for personal property (equipment, vehicles) since the Tax Cuts and Jobs Act of 2017 restricted the provision to real property only.