Unrecaptured Section 1250 Gain

Unrecaptured Section 1250 gain is the portion of the gain on the sale of depreciable real property that is attributable to depreciation previously deducted, and it is taxed at a maximum federal rate of 25%, higher than the regular long-term capital gains rates of 0%, 15%, or 20%. When an investor owns real estate, they claim annual depreciation deductions that reduce taxable income and also reduce the property's adjusted basis. On sale, the gain created by those accumulated depreciation deductions does not get the preferential capital gains rate; instead, this "unrecaptured Section 1250 gain" is taxed at up to 25%. The name comes from Section 1250 of the tax code, which governs depreciation recapture on real property. Unlike Section 1245 recapture on personal property, which is taxed as ordinary income, Section 1250 recapture for real estate using the straight-line depreciation method (required for real property placed in service after 1986) is capped at 25% rather than the full ordinary rate, but it is still higher than the rate on the remaining capital gain. This is one reason a sale can produce a larger tax bill than investors expect, and why deferral tools matter: a 1031 exchange defers the unrecaptured 1250 gain along with the rest of the gain, and a step-up in basis at death can eliminate it entirely. Because boot received in an exchange is generally taxed first as the highest-rate component, recapture is recognized before lower-rated capital gain. The precise calculation should be confirmed with a tax professional.