Depreciation Recapture Tax Rates: 1245 vs. Unrecaptured 1250

Two rates, not one

People searching for a single depreciation recapture rate usually find two instead, and for good reason: the tax code treats personal property and real property differently on sale. Section 1245 property, the 5- and 7-year buckets a cost segregation study pulls out of a building, recaptures as ordinary income with no cap, taxed at whatever the seller's ordinary rate is in that year. Section 1250 property, the building's straight-line real property shell, produces unrecaptured section 1250 gain, a rate capped at 25% regardless of the seller's ordinary bracket.

The bucket-by-bucket breakdown

Here is how the classes a cost segregation study identifies map onto recapture character. See 5-, 7-, and 15-year property examples for what physically sits in each row.

Land itself is not in this table because land never depreciates, see land value vs. building basis, so it never generates recapture of any kind.

Why 1245 has no cap and 1250 does

Section 1245 recapture exists to recover the ordinary-rate benefit a taxpayer got from depreciating personal property, so the code pulls that gain back at the same ordinary rate it was deducted against, with no ceiling. Unrecaptured section 1250 gain works differently: Congress capped it at 25% as a middle rate, higher than the long-term capital gains rate most real estate appreciation gets, but lower than ordinary income, reflecting that straight-line depreciation on real property was always the slower, more conservative method to begin with.

What a study actually changes

A cost segregation study does not alter either rate. What it changes is the split: how much of a building's basis sits in the ordinary-rate 1245 buckets versus the capped-rate 1250 shell. A building with no study still has some 1245 property built into its original construction cost, most buildings do, it is simply less precisely identified and less accelerated. The study's job is finding and accelerating that 1245 and 15-year basis, not creating recapture exposure that would not otherwise exist.

Why this table matters more before the sale than after it

The rate an owner ends up paying is fixed by the code once a sale happens, ordinary for 1245, capped at 25% for unrecaptured 1250 gain, with no room to negotiate the character after the fact. What is still flexible before a sale is the timing: when to sell, whether to exchange instead under a 1031 exchange, and how a specific year's gain composition interacts with the rest of that year's income. Knowing the table above in advance, rather than discovering it at closing, is what lets an owner and a CPA actually plan around it instead of reacting to it.

A property owner comparing two possible sale years, for instance, can ask a meaningfully different question once the table is in hand: not just what the total gain looks like, but how much of that gain in each candidate year falls into the uncapped ordinary bucket versus the capped 25% bucket, given whatever else is happening on that year's return.

A free-standing restaurant, run through the table

A free-standing restaurant with a $2,804,440 building basis produced $599,678 in first-year deductions on a $9,000 fee, a 66.6-to-1 ratio, heavy on 5- and 7-year kitchen equipment relative to its size. That composition matters here specifically because a restaurant study typically carries more of its basis in the uncapped, ordinary-rate 1245 buckets than a simple office shell would, given how much equipment a commercial kitchen contains. The same building basis on a plain office shell would likely carry a larger share in the capped-rate 1250 bucket instead. Same table, different property, different mix of rows filled in.

How these rates interact with a sale's overall gain

A property's total gain on sale is not one number taxed at one rate, it is the sum of pieces, each carrying whichever character its underlying depreciation produced. Straightforward appreciation above the original basis is typically long-term capital gain, taxed at capital gains rates. The 1245 and 1250 pieces described above sit alongside that appreciation, taxed at their own rates, on the same sale, in the same tax year. Splitting a sale's proceeds into these separate pieces, rather than treating the whole gain as one rate, is exactly the calculation your CPA runs at closing.

A larger accelerated basis from a cost segregation study generally means a larger 1245 or 15-year piece sitting inside that total, which is the tradeoff described throughout this page: more acceleration up front, a correspondingly larger recapture calculation whenever the sale eventually happens.

Reading the rates against your own numbers

A free Preliminary Benefit Estimate at /qualify shows the likely first-year deduction split a study would produce for a specific building. How that split translates into recapture rates at a future sale, and what an owner's blended rate looks like across both buckets, is a question for your CPA, since it depends on your income, your holding period, and the specific gain composition on that return. The full recapture framework, apart from cost segregation specifically, is covered at /blog/depreciation-recapture.

Owners planning a sale years out sometimes ask whether these rates are likely to change before then. Rate structures are set by statute and can shift with future legislation, so the specific percentages an owner ultimately faces depend on the law in effect at the time of sale, not necessarily the rates described here today.

Frequently asked questions

What is the depreciation recapture tax rate for cost segregation?

There is no single rate. Personal property (5- and 7-year, section 1245) recaptures at ordinary income rates with no cap. The building's real property shell produces unrecaptured section 1250 gain, capped at 25%. A study affects how much basis sits in each bucket, not the rates themselves.

Is 1245 recapture always taxed at my top marginal rate?

It is taxed at ordinary income rates in the year of sale, which depends on the seller's total taxable income that year, not a fixed statutory percentage. Whether that lands at your top bracket is a calculation for your CPA.

What exactly is unrecaptured section 1250 gain?

It is the gain attributable to depreciation taken on real property (the building shell), taxed at a rate capped at 25% instead of ordinary rates. It applies regardless of whether a cost segregation study was ever done, since straight-line real property depreciation always produces it on sale.

Does taking bonus depreciation change the recapture rate?

No. Bonus depreciation changes when the deduction is taken, pulling it into year one, but the recapture character and rate on sale still follow the asset's underlying classification, 1245 or 1250, not whether bonus was claimed.

Where can I read the full recapture rules, separate from cost segregation?

The general recapture mechanics, independent of cost segregation specifically, including how the rules apply to property that never had a study, are covered at /blog/depreciation-recapture, which this page draws on and applies to the specific buckets a cost segregation study identifies.