# Unrecaptured Section 1250 Gain: What It Is, How It Works, and Example

![Unrecaptured Section 1250 Gain: An IRS tax provision where depreciation is recaptured when a gain is realized on the sale of depreciable real estate.](https://www.investopedia.com/thmb/mn-XzO1f_R9DGBcEAGjAjqzZ188=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Unrecaptured-1250-gain_final-f74610188e8542aba3a79c35408552b9.png)

*— Michela Buttignol / Investopedia*

## What Is an Unrecaptured Section 1250 Gain?

An unrecaptured 1250 gain is a gain addressed by Section 1250 of the U.S. Internal Revenue Code. This provision directs that previously recognized depreciation be recaptured as income when a gain is realized on the sale of depreciable real estate property.

Such gains are taxed at a maximum 25% tax rate, though the rate is less in some cases. The gains, and the taxes on them, are calculated on a worksheet within the instructions for Internal Revenue Service (IRS) [Schedule D](https://www.investopedia.com/terms/s/scheduled.asp), reported on Schedule D, and carried through to the taxpayer’s 1040.

### Key Takeaways

*   An unrecaptured [Section 1250](https://www.investopedia.com/terms/s/section1250.asp) gain involves an income tax provision that directs the recapture as income of the portion of a gain related to previously used [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) allowances.
*   It is only applicable to the sale of depreciable [real estate](https://www.investopedia.com/terms/r/realestate.asp).
*   Unrecaptured Section 1250 gains are usually taxed at a 25% maximum rate.
*   Section 1250 gains can be offset by Section 1231 capital losses.
*   Section 1250 applies to real property, whereas Section 1245 applies to personal property.

## How Unrecaptured Section 1250 Gains Work

Section 1231 assets include all depreciable [capital assets](https://www.investopedia.com/terms/c/capitalasset.asp) held by a taxpayer for longer than one year. Section 1231 relates to assets addressed by Section 1245 and Section 1250, and the latter is what determines the tax rate of [depreciation recapture](https://www.investopedia.com/terms/d/depreciationrecapture.asp).

Section 1250 relates only to real property, such as buildings and land. Personal property, such as machinery and equipment, is subject to depreciation recapture as [ordinary income](https://www.investopedia.com/terms/o/ordinaryincome.asp) under [Section 1245](https://www.investopedia.com/terms/s/section1245.asp).

### Recognition of Gains

Unrecaptured Section 1250 gains are only realized when there is a net [Section 1231](https://www.investopedia.com/terms/s/section-1231.asp) gain. In essence, capital losses on all depreciable assets offset unrecaptured Section 1250 gains on real estate. Therefore, a net capital loss overall reduces the unrecaptured Section 1250 gain to zero.

A Section 1250 gain is recaptured upon the sale of depreciated real estate, just as with any other asset; the only difference is the rate at which it is taxed.

### Reason for the Rule

The justification for the gain is to offset the benefit of previously used depreciation allowances. While the gains attributed to accumulated depreciation are taxed at the section 1250 recapture tax rate, any remaining gains are only subject to the long-term [capital gains rate](https://www.investopedia.com/terms/c/capital_gains_tax.asp) of 15%.

> **Fast Fact**
>
> For a capital loss to offset a capital gain, both must be determined to be short-term or long-term. A short-term loss cannot offset a long-term gain or vice versa.

## Example of Unrecaptured Section 1250 Gains

If a property was initially purchased for $150,000, and the owner claims depreciation of $30,000, the [adjusted cost basis](https://www.investopedia.com/terms/a/adjustedcostbase.asp) for the property is considered to be $120,000.

> $150,000 - $30,000 = $120,000

If the property is subsequently sold for $185,000, the owner recognizes an overall gain of $65,000 over the adjusted cost basis.

> $185,000 - $120,000 = $65,000

Since the property sold for more than the basis that was adjusted for depreciation, the unrecaptured Section 1250 gains are based on the difference between the adjusted cost basis and the original purchase price.

> $150,000 - $120,000 = $30,000  

This makes the first $30,000 of the profit subject to the unrecaptured Section 1250 gain, while the remaining $35,000 is taxed at the regular long-term capital gains rate.

> $65,000 - $30,000 = $35,000

As a result, $30,000 is subject to the higher capital gains tax rate of up to 25%. The remaining $35,000 is taxed at the long-term capital gains rate of 15%.

## Special Considerations

### Offsetting Gains

Since the unrecaptured Section 1250 gains are considered a form of [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp), they can be offset by capital losses. These capital losses must be reported through [Form 8949](https://www.investopedia.com/articles/personal-finance/083015/purpose-irs-form-8949.asp) and Schedule D. The value of a loss may vary depending on whether it is determined to be short-term or long-term in nature.

### Property Changes

Investors can avoid paying tax on depreciation recapture by turning a residential property into a primary residence. The taxpayer could also conduct a [1031 like-kind exchange](https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx). This type of exchange is tax-deferred but not tax-free.

### Inheritance

When a property owner passes away, their heirs often receive the property on a [stepped-up basis](https://www.investopedia.com/terms/s/stepupinbasis.asp). This means that the cost basis of the inherited property is adjusted to its fair market value at the time of the former owner’s death. By increasing the basis, the system decreases the amount of tax the property’s new owners will have to pay on any gains realized by an eventual sale.

## What Are Examples of 1250 Property?

Examples of Section 1250 property include commercial buildings and residential rental property. Commercial buildings would be treated as Modified Accelerated Cost Recovery System (MACRS) real property, which is depreciated over a 39-year recovery period. Residential rental property is depreciated over a 27.5-year recovery period.

## How Much Tax Do I Pay on Unrecaptured Section 1250 Gain?

The maximum rate attributable to unrecaptured Section 1250 gains is 25%.

## How Do I Calculate Section 1250 Recapture?

Section 1250 is calculated as the lesser of two amounts. The first amount is the excess of accelerated depreciation claimed on real property over what would have been the allowable amount under a straight-line method. The second amount is the gain realized upon disposition.

## What Triggers Depreciation Recapture?

Depreciation recapture occurs when there is a difference between the sale price of an asset and the tax basis or adjusted cost basis. The difference in these two amounts is recaptured by reporting the difference as ordinary income.

## The Bottom Line

A Section 1250 gain refers to the taxable gain from the sale of depreciable real property. The recognition of the gain is governed by Section 1250 of the Internal Revenue Code (IRC), which deals with the tax treatment of depreciation recapture.

When a property owner sells a depreciable asset, the IRS requires the owner to recapture a portion of the depreciation claimed on the property over the years. The recaptured amount is taxed at a special rate known as the Section 1250 recapture rate, which is generally 25%.

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Topic No. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409).”
>     
> 2.  Internal Revenue Service. “[About Schedule D (Form 1040), Capital Gains and Losses](https://www.irs.gov/forms-pubs/about-schedule-d-form-1040).”
>     
> 3.  Internal Revenue Service. “[Publication 544, Sales and Other Dispositions of Assets](https://www.irs.gov/publications/p544).”
>     
> 4.  Internal Revenue Service. “[Publication 544: Sales and Other Disposition of Assets](https://www.irs.gov/pub/irs-pdf/p544.pdf),” Page 28.
>     
> 5.  Internal Revenue Service. “[About Form 8949, Sales and Other Dispositions of Capital Assets](https://www.irs.gov/forms-pubs/about-form-8949).”
>     
> 6.  Internal Revenue Service. “[Like-Kind Exchanges Under IRC Section 1031](https://www.irs.gov/pub/irs-news/fs-08-18.pdf).”
>     
> 7.  Internal Revenue Service. “[Publication 551: Basis of Assets](https://www.irs.gov/pub/irs-pdf/p551.pdf),” Page 2.
>     
> 8.  Internal Revenue Service. “[Publication 527, Residential Rental Property](https://www.irs.gov/publications/p527).”
>     
> 9.  Internal Revenue Service. “[Publication 946, How to Depreciate Property](https://www.irs.gov/publications/p946).”