Bonus Depreciation Recapture Calculation: 2026 Guide
Bonus depreciation recapture turns the tax benefit you claimed on a short-term rental or residential rental property into a tax bill the day you sell it for a gain, and the math splits into two different rates depending on which asset class you're recapturing.
- Bonus depreciation recapture calculation splits into ordinary income under Section 1245 and capped 25% gain under Section 1250.
- A $125,000 reclassified basis fully depreciated via bonus depreciation can trigger $46,250 in ordinary-rate recapture at a 37% bracket.
- A 1031 exchange can defer recapture on a residential rental or STR sale entirely if structured before closing.
- Unrecaptured Section 1250 gain on the building shell is capped at 25%, not your marginal rate.
- Form 4797 is where recapture gets reported, not Schedule D alone.
Why This Recapture Math Actually Matters
Cost segregation front-loads depreciation by reclassifying part of a residential rental or short-term rental into 5, 7, and 15-year property instead of the standard 27.5-year schedule. Under the One Big Beautiful Bill Act (OBBBA), bonus depreciation returned to 100% for property acquired and placed in service after January 19, 2025, which means that reclassified basis can hit $0 in year one.
That's the win. The catch shows up at sale. If you sell for more than your adjusted basis, the IRS wants back the tax benefit of every dollar of depreciation you claimed, and it doesn't recapture it all at the same rate. Owners who ran a cost segregation study for their Airbnb or short-term rental often assume the whole gain gets long-term capital gains treatment. It doesn't, and the gap between what you expect and what you owe in 2026 can run into five figures on a single property.
What You'll Need Before You Calculate Recapture
- Your cost segregation report showing the dollar amount reclassified into 5, 7, and 15-year property
- Your depreciation schedule (from your CPA or tax software) showing accumulated depreciation by asset class
- The closing statement from the sale, or an estimated sale price if you're modeling ahead of a sale
- Your original cost basis, split between land, building, and personal property
- A copy of Form 4797 (Sales of Business Property) and its instructions
- Your CPA, since this calculation feeds directly into your tax return and adjusts your basis going forward
The Steps
1. Pull the depreciation breakdown from your cost segregation report
Your report should show exactly how much basis moved into 5-year, 7-year, and 15-year property versus what stayed in the 27.5-year residential building bucket. A typical engineering-based study on a residential rental reclassifies somewhere around 20-45% of the depreciable basis, though the actual figure depends on the property's finishes and systems. This split is the foundation for the entire recapture calculation, and getting it wrong here compounds every step after.
Common mistake: using the total cost seg deduction instead of separating it by recovery period. Section 1245 and Section 1250 recapture are calculated on different asset buckets, not on one lump sum.
2. Separate Section 1245 property from Section 1250 property
Section 1245 covers the personal property and land improvements the cost seg study identified: appliances, cabinetry, decking, parking pads, landscaping. Section 1250 covers the building structure itself, still on the 27.5-year residential schedule. This matters because the two sections recapture at different rates.
Common mistake: treating land improvements like fencing or driveways as part of the building. They're Section 1245 property and recapture as ordinary income, not the capped 25% rate that applies to the structure.
3. Total the accumulated depreciation on each bucket
Add up every dollar of depreciation claimed on the Section 1245 assets (often fully depreciated in year one under 100% bonus depreciation) and separately total the straight-line depreciation claimed on the Section 1250 building.
Example: a $500,000 residential rental has a cost segregation study reclassify 25% of basis, or $125,000, into 5, 7, and 15-year property. That $125,000 is fully depreciated via 100% bonus depreciation in year one. The remaining $375,000 building basis depreciates straight-line over 27.5 years, or about $13,636 per year.
4. Allocate the sale price and calculate the gain
If the property sells three years later for $600,000, the gain over adjusted basis needs to be allocated across the same asset classes used for depreciation. By year three, the building has taken roughly $40,908 in straight-line depreciation ($13,636 x 3), and the Section 1245 assets sit at $0 basis after full bonus depreciation.
5. Calculate Section 1245 recapture at ordinary income rates
Section 1245 recapture is the lesser of the depreciation claimed or the gain attributable to that property, and it's taxed at your ordinary income rate, up to 37% for high earners in 2026. On the $125,000 fully depreciated in this example, recapture tax at a 37% bracket runs $46,250. That's the number that surprises owners who assumed capital gains treatment applied across the board.
6. Calculate unrecaptured Section 1250 gain at the capped 25% rate
The straight-line depreciation taken on the building itself, $40,908 in this example, becomes unrecaptured Section 1250 gain when the property sells at a profit. This portion is capped at a maximum 25% rate rather than your ordinary bracket, which works out to $10,227 in this scenario, still capital gain, just at a higher ceiling than the standard 15% or 20% long-term rate.
| Component | Amount | Rate | Tax Owed |
|---|---|---|---|
| Section 1245 recapture (personal property/land improvements) | $125,000 | 37% ordinary | $46,250 |
| Unrecaptured Section 1250 gain (building) | $40,908 | 25% max | $10,227 |
| Remaining long-term capital gain | Remainder of total gain | 15-20% | Varies |
7. Add net investment income tax if it applies
High earners above the NIIT thresholds owe an additional 3.8% on top of the recapture amounts if the rental income is passive. On the $165,908 combined recapture in this example, that's another $6,304 before the remaining capital gain is even taxed.
Common mistake: forgetting NIIT entirely because it doesn't show up on the recapture line items themselves, it layers on top.
8. Report the recapture on Form 4797
Section 1245 and Section 1250 recapture both get reported on Form 4797, not directly on Schedule D. Your CPA carries the ordinary income portion to your 1040 and the capital gain portion flows through separately. If you're catching up depreciation you missed in prior years before a sale, that adjustment runs through Form 3115 for missed depreciation first, and it changes your recapture basis.
Troubleshooting: Common Recapture Calculation Mistakes
- Treating all gain as capital gain. The Section 1245 portion is ordinary income, full stop, regardless of how long you held the property.
- Ignoring land improvements as a separate bucket. Fencing, pools, and parking areas identified in a cost seg study are Section 1245 property, not part of the building.
- Skipping the NIIT layer. Add 3.8% on top of both recapture calculations if your income exceeds the threshold for the year.
- Assuming a loss on paper means no recapture. Recapture applies to the gain over adjusted basis, which can still exist even if the sale feels underwhelming relative to what you put in.
- Not adjusting basis after a 1031 exchange. Deferred gain from a prior exchange carries forward and changes your recapture exposure on the replacement property. See how cost segregation combines with a 1031 exchange before assuming the numbers reset.
- Confusing recapture with capital gains tax planning. These are related but separate calculations; the strategies for reducing capital gains tax with cost segregation only address the portion of gain that isn't already subject to recapture.
Tools and Resources
- Your cost segregation report's asset class breakdown (5-year, 7-year, 15-year, 27.5-year)
- IRS Form 4797 instructions for the current tax year
- A depreciation schedule from your CPA showing accumulated depreciation by asset
- A basis worksheet if you've done a 1031 exchange or a Form 3115 catch-up in a prior year
Get your cost segregation numbers right
A flat-fee, engineering-based study gives you the asset breakdown recapture math needs.
What to Do Next
If you're planning a sale in 2026 and the recapture numbers look steep, model a 1031 exchange before you list the property. Deferring the gain defers the recapture too, though the deferred amount still follows the replacement property's basis. Talk to your CPA about timing the sale and the exchange identification window together, not as separate decisions made months apart.
FAQ
What is bonus depreciation recapture?
Bonus depreciation recapture is the tax owed when you sell a property for more than its depreciated basis, reclaiming part of the tax benefit from depreciation you already claimed. On residential rentals with a cost segregation study, this splits between ordinary income (Section 1245) and capped-rate capital gain (Section 1250).
How is bonus depreciation recapture calculated in 2026?
You total the depreciation claimed on each asset class, then apply ordinary income rates up to 37% to Section 1245 property and a 25% cap to unrecaptured Section 1250 gain on the building. Net investment income tax of 3.8% can apply on top for high earners.
Is bonus depreciation recapture taxed as ordinary income or capital gains?
Both, depending on the asset class. Personal property and land improvements reclassified by a cost segregation study recapture as ordinary income under Section 1245, while the building structure's straight-line depreciation recaptures as capital gain capped at 25% under Section 1250.
Can a 1031 exchange avoid bonus depreciation recapture?
A properly structured 1031 exchange defers recapture rather than eliminating it, carrying the deferred gain and depreciation history into the replacement property's basis. The exchange must close within IRS timelines to qualify.
Does bonus depreciation recapture apply to Airbnb and short-term rentals?
Yes. Short-term rentals that used a cost segregation study to accelerate depreciation face the same Section 1245 and Section 1250 recapture rules as any other residential rental property when sold at a gain.
What's the difference between Section 1245 and Section 1250 recapture?
Section 1245 applies to personal property and land improvements, taxed at ordinary income rates up to 37%. Section 1250 applies to the building structure, taxed as unrecaptured gain capped at a maximum 25% rate.
How does net investment income tax affect recapture?
High earners above the NIIT income thresholds owe an additional 3.8% on both the Section 1245 and Section 1250 recapture amounts if the rental activity is treated as passive income.
Do I owe recapture if I sell at a loss?
Recapture applies to the gain over adjusted basis, not the difference between purchase price and sale price. It's possible to have a smaller-than-expected profit and still owe recapture on the depreciation claimed.
One Last Thing
The part most owners miss: recapture on the Section 1245 bucket doesn't care how long you held the property. Whether you sell in year one or year ten, that fully-depreciated $125,000 from the example above still recaptures at your ordinary rate, up to 37% in 2026, the moment the sale price exceeds basis. Long holding periods reduce your exposure on the building's Section 1250 gain, not the personal property bucket.