Section 1250 Recapture Tax Rate Explained (2026)
If you're selling a rental property or planning a cost segregation study, the Section 1250 recapture tax rate decides how much of your depreciation benefit you give back to the IRS at sale. This guide breaks down the calculation step by step, with real numbers for 2026.
- The 1250 recapture tax rate caps unrecaptured Section 1250 gain at 25% federal in 2026, not your ordinary bracket.
- Cost segregation assets reclassified as personal property face Section 1245 recapture at ordinary rates up to 37%, not the 25% cap.
- A $500,000 property with 25% reclassified through cost segregation can carry very different recapture exposure depending on asset class.
- Net investment income tax adds 3.8% on top of both recapture categories for high earners.
- A 1031 exchange defers all of it, including the 1245 and 1250 components, if structured correctly.
Why this matters
Cost segregation works by pulling value out of the 27.5 or 39-year building bucket and moving it into 5, 7, and 15-year buckets, where you can claim bonus depreciation immediately. That's the whole point of the strategy. But every dollar of accelerated depreciation you claim now becomes a dollar of potential recapture when you sell.
Most investors understand this in theory and then get surprised at closing. The surprise usually isn't the recapture itself. It's that two different tax rates apply to two different pieces of the same sale, and mixing them up leads to a bad estimate on your tax return. Understanding how bonus depreciation recapture gets calculated before you sell (not after) is what separates investors who plan for it from investors who write a surprise check to the IRS.
What you'll need
- Your original cost segregation study or a depreciation schedule from your CPA showing asset classes
- Total accumulated depreciation claimed by asset category (5-year, 7-year, 15-year, and 27.5 or 39-year real property)
- Your expected sale price and adjusted basis
- Your current federal ordinary income tax bracket (assume 37% for high W-2 earners in this guide)
- A rough state tax rate, since most states tax recapture as ordinary income regardless of the federal treatment
- 15 to 20 minutes with a calculator or spreadsheet before you call your CPA
The steps
1. Separate your depreciation into 1245 and 1250 buckets
This is the step almost everyone skips. Personal property and most land improvements reclassified through cost segregation (carpet, cabinetry, decking, fencing, appliances, parking areas) fall under Section 1245. The remaining structural building components stay Section 1250 property.
Pull your depreciation schedule and total the accumulated depreciation separately for each bucket. If your cost segregation study reallocated 25% of a $500,000 property, that's roughly $125,000 moved into the 1245 short-life buckets, with the remaining basis staying in the 1250 building bucket.
Common mistake: treating all accelerated depreciation as one lump sum. The IRS doesn't, and neither should your recapture math.
2. Calculate Section 1245 recapture on the reclassified assets
Gain attributable to depreciation claimed on Section 1245 property is recaptured as ordinary income, up to the amount of depreciation you took, capped at your marginal rate. For a high W-2 earner in the 37% bracket, that $125,000 of accelerated depreciation could mean up to $46,250 taxed as ordinary income in the year of sale, before state tax.
This is the piece people forget: it doesn't get the capital gains treatment at all. It's fully ordinary.
3. Calculate unrecaptured Section 1250 gain on the building
The portion of depreciation tied to the structural building (the 27.5 or 39-year bucket) is taxed differently. It's still capital gain, but Section 1(h) caps the rate at 25% federal instead of the standard 15% or 20% long-term capital gains rate. This is what's called unrecaptured Section 1250 gain, and it's the reason the phrase "1250 recapture tax rate" usually means 25%, not your ordinary bracket.
If your building depreciation over the holding period totals $80,000, up to that amount of gain gets taxed at 25% instead of 15% or 20%. That's a 5 to 10 percentage point difference on $80,000, or $4,000 to $8,000 in extra federal tax depending on your bracket.
4. Add state tax on top
Most states don't recognize the federal 25% cap. They tax recapture (both 1245 and 1250 components) as ordinary state income. In a high-tax state, this can add another 5% to 13% on top of the federal numbers above. In a no-income-tax state, this step disappears entirely.
5. Layer in net investment income tax
If your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly, the 3.8% net investment income tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. Rental gain, including recapture, generally counts as net investment income unless you qualify as a real estate professional with material participation.
6. Model the bonus depreciation trade-off
Bonus depreciation is back to 100% for residential rental property placed in service after January 19, 2025 under the One Big Beautiful Bill Act. That means larger first-year deductions in 2026, and it also means a larger 1245 recapture bucket if you sell within a few years. Run the numbers both ways: the upfront tax deferral almost always outweighs the recapture cost when you hold long enough for the time value of money to work in your favor, but it's worth modeling before you assume that's automatic for your specific holding period.
7. Decide whether to sell or defer
Once you know your combined 1245 and 1250 exposure, compare it against deferral strategies. Using cost segregation to reduce capital gains tax on a replacement property, or combining cost segregation with a 1031 exchange, can push the entire recapture calculation into the future instead of triggering it this year.
8. Confirm the math with your CPA before filing
Recapture calculations touch Form 4797 and flow into your Schedule D. A CPA who has your full depreciation schedule can confirm the 1245 versus 1250 split and make sure the correct rate applies to each piece. This isn't a step to DIY on a spreadsheet the week before you file.
Get your depreciation numbers straight
See how much of your property could be reclassified before you sell.
Troubleshooting
"I sold and got taxed at 37% on everything." This usually means the 1245 and 1250 buckets weren't separated on the return, or the preparer defaulted to ordinary rates across the board. Go back to the original cost segregation report and confirm the asset-level breakdown.
"My CPA says there's no cost segregation study on file." Without a study, most preparers can't defend a 1245/1250 split at sale, which often means the entire gain gets treated as if it were straight-line 1250 property, losing the benefit of any accelerated classification.
"I thought bonus depreciation meant no recapture." Bonus depreciation and recapture are separate events at separate times. Bonus depreciation lowers your tax bill in the year you claim it; recapture happens in the year you sell. They're connected, not mutually exclusive.
"The 25% rate seems low compared to my bracket." That's the point of unrecaptured Section 1250 gain. It's a ceiling, not a floor. If your ordinary bracket is lower than 25%, your capital gains rate still applies instead.
"I'm in a no-income-tax state, does that change anything?" It removes the state tax layer described in step 4, but the federal 25% cap and 37% ordinary treatment on 1245 assets still apply exactly the same.
Tools and resources
- Your original cost segregation study, with the asset-by-asset breakdown (see what's typically inside a full report)
- Form 4797 instructions from the IRS for reporting the sale of business property
- A depreciation schedule from your CPA or tax software showing accumulated depreciation by asset class
- A basic spreadsheet to model the 1245 versus 1250 split before your CPA finalizes the return
What to do next
If you're holding a short-term rental with a cost segregation study already in place, run the sale scenario now, before you list the property, not after you're under contract. If you haven't ordered a study yet and you're planning to sell within the next few years, a study for Airbnb and short-term rental properties still makes sense in most cases, since the deferred tax value from bonus depreciation in 2026 typically outweighs the recapture cost years down the line.
FAQ
What is the 1250 recapture tax rate in 2026?
The maximum federal rate on unrecaptured Section 1250 gain is 25% in 2026. This applies to the portion of gain tied to depreciation on the structural building, separate from any Section 1245 personal property recapture, which is taxed at ordinary rates up to 37%.
Is Section 1250 recapture the same as Section 1245 recapture?
No. Section 1245 recapture applies to personal property and certain land improvements and is taxed at your ordinary income rate, up to 37% in 2026. Section 1250 recapture applies to the structural building and is capped at 25% federal.
Does cost segregation increase my recapture exposure?
It shifts more depreciation into the 1245 ordinary-rate bucket instead of the 1250 capped bucket, which can mean higher recapture on the reclassified portion. Most investors still come out ahead because of the time value of accelerated deductions taken years earlier.
Can a 1031 exchange avoid Section 1250 recapture?
Yes, a properly structured 1031 exchange defers both 1245 and 1250 recapture along with the underlying capital gain, as long as the replacement property and timing rules are met.
How much does the net investment income tax add to recapture?
An additional 3.8% applies to net investment income above the MAGI threshold ($200,000 single, $250,000 married filing jointly), and rental sale gain including recapture generally counts toward that calculation.
Does the 1250 recapture rate apply to my state taxes too?
Most states tax recapture as ordinary income regardless of the federal 25% cap, so your total rate is usually higher than the federal number alone once state tax is added.
Does 100% bonus depreciation in 2026 change how recapture is calculated?
Bonus depreciation restored to 100% under the One Big Beautiful Bill Act for property placed in service after January 19, 2025 increases the size of the 1245 bucket eligible for accelerated deductions, which can raise future ordinary recapture exposure if the property is sold within a few years.
Should I skip cost segregation to avoid recapture later?
Skipping the study rarely helps, since you still owe unrecaptured Section 1250 gain on the building portion at sale even without a study, just without the years of accelerated deductions that came from claiming it properly.
One last thing
The part investors miss most often isn't the rate itself, it's the timing mismatch. You get the 1245 deduction at your marginal rate in the year you claim it, often 37%, but you only pay recapture at that same 37% rate on sale if you actually sell within a short window. Hold the property for 10 or 15 years and the deferred tax savings compound in ways a flat recapture rate calculation on paper doesn't capture. Run both the deduction value and the eventual recapture cost through a present-value lens before deciding a study isn't worth it.