Depreciation recapture calculator
Updated
Split the gain on a property sale into §1245 recapture, unrecaptured §1250 gain and §1231 capital gain, see the tax on each, and compare paying now with investing the deferrable part in an Opportunity Zone fund.
| Amount realized (price − selling costs) | $1,900,000 |
| Adjusted basis (cost − depreciation) | $800,000 |
| Total gain | $1,100,000 |
| §1245 recapture, ordinary income | $100,000 → tax $37,000 |
| Unrecaptured §1250 gain, max 25% | $300,000 → tax $75,000 |
| Remaining §1231 / capital gain | $700,000 → tax $140,000 |
| NIIT + state tax | $41,800 + $0 |
| Total tax if you sell and pay now | $293,800 |
The Opportunity Zone alternative (OZ 2.0)
| §1245 recapture: can't be deferred, taxed now | $40,800 |
| Gain you can invest in a QOF (unrecaptured §1250 + §1231 gain) | $1,000,000 |
| Blended tax rate on that gain when it's included (keeps its character) | 25.30% |
| Pay tax now, invest the rest: value after 10 years, after tax | $1,297,516 |
| Invest the eligible gain in a QOF: value after 10 years, after tax | $1,647,790 |
Both lines start from the eligible gain only (the §1245 tax is the same either way). The QOF line pays the deferred tax in year 5 after the 10% step-up, and the 10-year election excludes the fund's appreciation, including depreciation taken inside the fund. Assumes straight-line depreciation on the building (no additional §1250 depreciation) and a top-bracket federal rate you pick. Not tax advice.
The rules this calculator uses
- §1245 recapture: gain up to the depreciation on §1245 property (equipment, and building components reclassified in a cost-segregation study) is ordinary income (IRC §1245(a)).
- Unrecaptured §1250 gain: gain up to the straight-line depreciation on the building is taxed at no more than 25% (IRC §1(h)(1)(E), (h)(6)). Post-1986 buildings use straight-line depreciation, so there's normally no "additional depreciation" taxed as ordinary income under §1250(a); the calculator assumes none.
- The rest is §1231 gain, taxed as long-term capital gain (IRC §1231).
- NIIT: 3.8% on the gain for rental or investment property; not for property held in a non-passive trade or business (IRC §1411(c)(1)(A)(iii); Treas. Reg. §1.1411-4).
- Opportunity Zone deferral: only the §1231 gain above the §1245/§1250 ordinary-income amount can be invested in a QOF (Treas. Reg. §1.1400Z2(a)-1(b)(11)(iii)(A)). When it's included, it keeps its character, so the 25% category survives (§1.1400Z2(a)-1(c)(1)(i)). For OZ 2.0 investments the deferred gain is included after 5 years with a 10% basis step-up (30% for a rural fund), and after 10 years the election under IRC §1400Z-2(c) steps basis up to fair market value, including the fund's asset bases for a QOF partnership (Treas. Reg. §1.1400Z2(c)-1(b)(2)(i)).
Worked example
A rental building bought for $1.2 million sells for $2 million with $100,000 of selling costs, after $300,000 of straight-line depreciation and $100,000 of cost-segregation (§1245) depreciation. The adjusted basis is $800,000 and the gain $1.1 million: $100,000 of §1245 recapture ($37,000 at 37%), $300,000 of unrecaptured §1250 gain ($75,000 at 25%) and $700,000 of §1231 gain ($140,000 at 20%), plus $41,800 of NIIT, for $293,800 before state tax. In a QOF, the $100,000 of §1245 recapture is still taxed now; the other $1 million can be deferred.
Related: the OZ 2.0 tax calculator, the 180-day rule calculator (a §1231 gain's 180 days start on the sale date) and the QOZB test checker.
FAQ
How is depreciation recapture taxed on real estate?
Gain up to the straight-line depreciation taken on a building is "unrecaptured section 1250 gain", taxed at no more than 25% (IRC §1(h)(1)(E) and (h)(6)). Gain up to depreciation on section 1245 property, such as cost-segregated components, is ordinary income (IRC §1245(a)). The rest of the gain is long-term capital gain under §1231.
Does the 3.8% NIIT apply to depreciation recapture?
Yes, for rental and other investment property: NIIT reaches net gain from disposing of property unless it was held in a non-passive trade or business (IRC §1411(c)(1)(A)(iii)).
Can I defer depreciation recapture with an Opportunity Zone fund?
Only part of it. A §1231 gain qualifies only to the extent it exceeds the amount treated as ordinary income under §1245 or §1250 (Treas. Reg. §1.1400Z2(a)-1(b)(11)(iii)(A)). So §1245 recapture is taxed now, while unrecaptured §1250 gain and the remaining §1231 gain can be invested in a QOF within 180 days.
What rate applies when the deferred gain is included later?
The included gain keeps the character it would have had, including the §1(h) rate categories (Treas. Reg. §1.1400Z2(a)-1(c)(1)(i)), so the unrecaptured §1250 part is still taxed at up to 25% in the inclusion year.
Is there recapture when I sell a QOF investment after 10 years?
With the 10-year election, basis in the QOF interest is stepped up to fair market value; for a QOF partnership the bases of the partnership's assets are adjusted too (Treas. Reg. §1.1400Z2(c)-1(b)(2)(i)), so depreciation taken inside the fund isn't recaptured on that sale (IRC §1400Z-2(c)).
Not tax advice. Simplified: one federal rate you choose, a flat state rate, no AMT, phase-outs or installment reporting. Confirm with a tax professional.