It is two numbers, not one
Section 1250 recapture (ordinary income, no ceiling) and unrecaptured Section 1250 gain (capped at 25 percent). They go to different places on your return.
The short answer
Land comes out first
Split the land out of your basis at step two. Land was never depreciable, so it never generates recapture — but every later figure inherits the split you use.
Straight line, capped at 25
On a building placed in service after 1986, straight line is required, so the capped slice is usually all of it and the ordinary recapture is zero.
Have us do this calculation for you
Send the closing statement, the purchase allocation and the depreciation schedule and we will come back with the split and the tax on it. Call (212) 641-0673 or use the contact form. We come back within 24 hours, and we are available evenings and weekends. Confidential, and handled by a CPA or EA.
What most guides miss
It is two numbers, not one
Most guides treat 1250 recapture as one number taxed at 25 percent. It is two numbers, they are taxed differently, and they go to different places on your return.
The split is the hard part. The arithmetic after it is short.
01Two numbers
Section 1250 recapture against unrecaptured Section 1250 gain
No ceiling
The real one
Section 1250 recapture
Formuladepreciation allowed − straight line
Ordinary income at your marginal rate, up to 37 percent. It exists because before 1987 buildings could use an accelerated method.
On a post-1986 rental
Usually $0
25% ceiling
The rest of the gain
Unrecaptured Section 1250 gain
Formulamin(building gain, straight line depreciation)
Straight line portion. Ceiling of 25 percent. On a post-1986 building it is usually the whole of it, because Publication 946 requires straight line on real property.
On a post-1986 rental
Usually all of it
12pts
On a typical New York rental bought in the last thirty years, the first number is zero and the second is all of it. They still have to be separated: the first is ordinary income and the second stops at 25 percent. At the top rate that is a twelve point gap.
02Seven steps
Seven steps to calculate recapture on a rental property sale
The seven steps below use one Queens example, with the figures carrying from each step to the next.
Confirm it is Section 1250 property
Depreciable real property that is not Section 1245 property, so the building and its structural components. Appliances and removable carpet are not part of this calculation, because the 1245 rules apply to them.Split the land out of your basis
You bought the Queens rental in 2018 for $700,000, and the purchase allocation put $200,000 on the land. Your depreciable basis is $500,000, not $700,000. Land was never depreciable, so it never generates recapture.Find the depreciation allowed or allowable
Straight line over 27.5 years on $500,000 is about $18,180 a year, so $145,000 by the 2026 sale. Use what you could have claimed, not what you did. Your first and last years count as part years, under the mid month convention.Work out what you got
Sell for $900,000 with $54,000 of selling costs and the amount realized, meaning what you got for it after those costs, is $846,000. Split it between building and land at sale date values. Assume they held the purchase ratio, so $604,000 and $242,000.Work out the gain on each
Building: $604,000 less its adjusted basis of $355,000, so $249,000. Land: $242,000 less $200,000, so $42,000. Total gain $291,000.Split the building gain
Additional depreciation is zero here, because the building ran straight line. The capped slice is the lower of the building gain or the depreciation, so $145,000 and not $249,000. That leaves $104,000 of building gain, which with the $42,000 of land gain makes $146,000 of regular gain.Net it and rate it
Both gains go into Section 1231 netting. With no offsetting Section 1231 losses and no lookback from the previous five years, all $291,000 is long term capital gain. $145,000 is capped at 25 percent, so up to $36,250 of federal tax before net investment income tax and New York.
A defensible allocation uses sale date values, and over eight years land and building rarely move together, so get an appraisal behind step 4 if the numbers are large.
The Queens sale, from purchase price to the capped slice
1. What you own, bought June 2018
Purchase price $700,000
Land $200,000
Depreciable basis $500,000
Never depreciable
Depreciation $145,000
Adjusted basis $355,000
2. Where the $291,000 gain comes from, sold June 2026
| Amount | |
|---|---|
| Sale price | $900,000 |
| Selling costs | ($54,000) |
| Amount realized | $846,000 |
| Land basis $200,000 plus building basis $355,000 | ($555,000) |
| Total gain | $291,000 |
3. How that $291,000 is taxed
Land $42K
Capped slice $145,000
Regular gain $104,000
Ceiling of 25 percent, so up to $36,250. $104,000 + $42,000 = $146,000 of regular gain, on the capital gain scale. Land never enters the capped slice.
Illustrative example, not tax advice. Your own figures and rates will differ.
03Forms and rates
Form 4797 Part III, the worksheet and Schedule D line 19
Both start on Form 4797. Part III computes the total gain and any additional depreciation treated as ordinary income. The Unrecaptured Section 1250 Gain Worksheet then produces the capped slice, recorded on line 19 of Schedule D. The 25 percent ceiling is applied later still, in the Schedule D Tax Worksheet.
Queens rental: $700,000 purchase with $200,000 of land, $145,000 of straight line depreciation
Section 1250 recapture
Faster than straight line. No ceiling.
On the Queens sale: $0
Reported on Form 4797 Part II, then Form 1040.
Unrecaptured Section 1250 gain
Straight line portion. Ceiling of 25 percent.
On the Queens sale: $145,000
Reported through the Worksheet, then Schedule D line 19.
On a building placed in service after 1986 the left hand number is zero.
04Form 3115
Form 3115 and amended returns for missed depreciation
1 year missed
1040-X
Goes on an amended return.
2+ years missed
Form 3115
Counts as an adopted method. Form 3115 claims the whole missed amount in one year, however many years it covers. Change number 107 covers property already disposed of.
Ask us to check whether the depreciation on your returns is right before you sell. A Form 3115 adjustment claims the whole missed amount in one year, and it is worth more in the year before a sale than in any year after it.
05What people get wrong
Why basis is not purchase price minus depreciation
The belief
My basis is what I paid, minus the depreciation.
What is true
Three adjustments separate those two figures. Land comes out before you depreciate anything. Improvements go in, and on a building held eight years there are usually some. Selling costs come off the proceeds rather than going into basis, which changes the gain but not the depreciation figure.
Why it costs money. Treating the full $700,000 as depreciable would add roughly $58,000 of depreciation, and all of it increases the capped slice. That is up to $14,500 of federal tax on a number that was never real. The error happens at step two, and every figure after it inherits it.
06What the steps do not include
Four things the seven steps do not include
Four things move the final number, and none of them belong in the steps above.
Net investment income tax
NIITMay add 3.8 percent on top of the federal ceiling.
New York State and City tax
NYNew York gives capital gains no preferential rate, so the state taxes the gain at ordinary rates. City resident tax applies on top only if you live in the five boroughs.
Suspended passive losses
PALsRelease on the disposal and can offset a large part of the gain.
The Section 1231 lookback
1231Can pull this year's gain back to ordinary income if you claimed Section 1231 losses in the previous five years.
07FAQ
Depreciation recapture calculation questions
Which of the two numbers applies to my rental?
Usually the capped slice alone. Real property placed in service after 1986 runs straight line, so there is no depreciation in excess of straight line and Section 1250 recapture is zero. The exception is bonus depreciation taken on qualified improvement property.
What if my purchase never allocated a value to the land?
You still have to split it. Use the assessor's land and improvement values for the purchase year, or an appraisal. Land generates no recapture, but it produces its own gain, which goes into Section 1231 netting with the building gain.
What if I never claimed depreciation on the property?
The calculation still uses the depreciation allowed or allowable. One year of missed depreciation can go on an amended return. Two or more consecutive years counts as an adopted method, and Form 3115 then claims the whole missed amount in the current year.
Do selling costs reduce the depreciation figure?
No. Selling costs come off the proceeds and reduce the gain. They leave the depreciation figure unchanged, though a smaller gain can cap the slice at the gain rather than at the depreciation.
Does the calculation change if I sell on installments?
The split is the same. The timing differs: unrecaptured Section 1250 gain comes out first as payments arrive, and any ordinary recapture is taxed in full in the year of sale.
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Get the number before closing
See the number before the closing
The split, the tax on each slice, and what New York adds, on your actual figures. While you can still price the deal around it. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising property owners on basis, depreciation and sale timing. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.