What is the "allowed or allowable" depreciation recapture rule?

The IRS requires you to reduce your property's basis by the depreciation you "allowed or allowable" — meaning the depreciation you could have claimed under the tax law, not just what you actually claimed. Even if you never deducted a single dollar of depreciation over 10 years, the IRS will compute your adjusted basis as if you had taken all allowable deductions. The result: you owe the same recapture tax whether you took the deductions or not — but if you skipped them, you also missed 10 years of annual tax savings on Schedule E. If you're within the 3-year amendment window, consult a tax professional about filing amended returns to claim missed depreciation.

What is the difference between Section 1250 recapture and LTCG?

The total gain on a rental property sale is split into two pieces. The portion equal to accumulated depreciation (up to the total gain) is called "unrecaptured Section 1250 gain" and is taxed at a maximum federal rate of 25% — not the normal LTCG rate. The remaining gain above the depreciation amount is taxed at 0%, 15%, or 20% depending on your total income. For example, if you made $200,000 total and took $80,000 in depreciation, the first $80,000 is taxed at max 25% and the remaining $120,000 is taxed at your normal LTCG rate.

How does a 1031 exchange defer depreciation recapture?

A 1031 like-kind exchange allows you to sell the rental property and roll all proceeds into a replacement property — deferring ALL taxes (recapture, LTCG, and NIIT) until you eventually sell the replacement property without exchanging again. You can chain multiple 1031 exchanges indefinitely, and if you hold the final property until death, heirs receive a stepped-up basis that eliminates the deferred gain entirely. To qualify: the replacement property must be identified within 45 days and closed within 180 days of the sale. You must use a qualified intermediary to hold the proceeds.

Does NIIT apply to rental property sales?

Yes. The 3.8% Net Investment Income Tax applies to rental income and gains from rental property sales if your MAGI exceeds $200,000 (single) or $250,000 (MFJ). The NIIT is calculated on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. Importantly, the NIIT thresholds are not indexed for inflation — they have not changed since 2013, so a growing share of property sellers are exposed each year.

What if I have a capital loss on the sale?

If your net sale price is less than or equal to your adjusted basis, you have a capital loss — no recapture tax and no LTCG tax applies. A capital loss on a rental property can be used to offset capital gains from other sales in the same year, and up to $3,000 of excess capital losses can be deducted against ordinary income annually. Unused losses carry forward indefinitely. Note: the "passive activity loss" rules may have already allowed or limited deductions from this property during the rental period.

Tax

Depreciation Recapture Calculator — Rental Property Sale

Calculate your unrecaptured Section 1250 tax, long-term capital gains tax, and NIIT when selling a residential rental — including the phantom recapture trap if you skipped depreciation deductions.

By The FinCalc TeamUpdated May 29, 2026

Selling a residential rental property triggers two separate federal taxes on top of ordinary capital gains: the unrecaptured Section 1250 tax (up to 25%) on depreciation you claimed — and the Net Investment Income Tax (3.8%) if your MAGI exceeds $200,000. What catches many landlords off guard is the IRS "allowed or allowable" rule: you owe recapture tax on the full allowable depreciation whether you actually claimed it or not. This calculator shows your complete federal tax bill, net proceeds, and how much a 1031 exchange would defer.

How Depreciation Recapture Works

The Three Layers of Federal Tax on a Rental Sale

When you sell a residential rental property at a gain, three separate federal taxes can apply:

1. Unrecaptured Section 1250 gain (max 25%)

Equal to your accumulated depreciation (capped at the total gain). Residential rental property is depreciated using the straight-line method over 27.5 years. At sale, the IRS "recaptures" this by taxing the equivalent portion of your gain at up to 25%.

2. Long-term capital gain (0%, 15%, or 20%)

Any gain above the depreciation recapture amount is regular LTCG, taxed at your income-based rate.

3. Net Investment Income Tax (3.8%)

Applies to the lesser of total gain or MAGI over the threshold. The surtax stacks on top of the above rates.

The Phantom Recapture Trap

The IRS computes recapture on the depreciation you could have claimed — not just what you actually claimed. If you owned a rental for 10 years and never depreciated it, you'll still owe recapture tax equal to 10 years of allowable straight-line depreciation. You missed all the annual deductions but still owe the exit tax.

When to Use This Calculator

Use this calculator before listing your rental property to estimate after-tax proceeds and inform your sale price decision.

Use it to compare 1031 exchange vs. outright sale — the calculator shows exactly how much tax a like-kind exchange would defer, which you can weigh against the cost and complexity of identifying and closing on a replacement property within the 45/180-day windows.

Use it if you inherited a rental property and want to understand the tax consequences of selling vs. continuing to rent.

Use it to plan income timing — knowing your total gain and expected LTCG rate, you can decide whether to delay the sale to a year with lower ordinary income, or accelerate a Roth conversion to use remaining low-rate brackets before the sale.

Related Calculators

NIIT Calculator — detailed 3.8% surtax analysis if you have multiple investment income sources
Florida SOH Portability Calculator — if you're selling a Florida property and buying a new homestead

Understanding the Inputs

Purchase Price & Land Value: Enter the total purchase price you paid for the property. Land is never depreciable, so you must subtract it from the purchase price to arrive at the depreciable building basis. Use the land value from your original appraisal, the county assessed land value, or a reasonable allocation (typically 10–25% of purchase price, though this varies widely by location).
Capital Improvements: Major improvements that extended the useful life of the property or added value: new roof, HVAC system, added square footage, kitchen or bath renovation. Do NOT include routine repairs and maintenance (fixing a leaky faucet, repainting). Improvements add to your depreciable basis and are themselves depreciated over 27.5 years from the date placed in service.
Years Owned as Rental: The number of years the property was in service as a rental. This is used to calculate accumulated depreciation. Full-year and partial-year service both count; the calculator uses whole years for simplicity. The IRS may use exact months, so actual depreciation could vary slightly.
Did You Claim Depreciation?: If you claimed depreciation on Schedule E each year, enter "Yes" and provide the cumulative amount from all prior returns. If you skipped depreciation deductions (common for landlords who didn't know), select "No" — the calculator will compute the full allowable depreciation and trigger the phantom recapture warning. The IRS uses the allowable amount regardless of what you actually claimed.
Gross Sale Price & Selling Costs: Gross sale price is the contract price before any closing costs. Selling costs include agent commissions (typically 5–6%), transfer taxes, attorney fees, title insurance, and other seller-paid closing costs. Net sale price (gross minus selling costs) is what the gain calculation is based on.
Other Taxable Income & MAGI: Your other taxable income is used to determine which LTCG rate bracket your gain falls into — gains stack on top of ordinary income. MAGI before the sale gain is used separately for the 3.8% NIIT threshold ($200K single, $250K MFJ). These can differ if you have deductions or add-backs that affect MAGI but not taxable income.

Frequently Asked Questions

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The FinCalc Team

Personal Finance Experts

The FinCalc team is a group of personal finance writers, analysts, and engineers dedicated to building accurate, transparent financial calculators. Every formula is verified against industry standards and explained in plain language.

Last reviewed and updated: May 29, 2026