Unrecaptured Section 1250 Gain: The Maximum 25% Rate Explained
Unrecaptured Section 1250 gain is the part of your gain on a building that comes from straight-line depreciation. It is taxed at your ordinary income rate, but never more than 25% federally (§1(h)(1)(E)). On a typical rental, it equals the smaller of the total depreciation you took on the building or your gain on the building, and it is the reason many sellers pay up to 25% on a large slice of their gain instead of 15% or 20%.
This guide explains where the number comes from, how it differs from "Section 1250 recapture," how it is taxed at different income levels, and how it behaves in installment sales and 1031 exchanges.
Section 1250 property, recapture and "unrecaptured" gain
Section 1250 property is depreciable real property that is not Section 1245 property: apartment buildings, office buildings, warehouses, rental houses and their structural components. Land is not depreciated, so it is neither.
Two different things carry the "1250" label, and they are easy to confuse.
| Term | What it is | Rate | Applies to modern rentals? |
|---|---|---|---|
| Section 1250 recapture (ordinary) | "Additional depreciation," meaning depreciation above straight-line | Ordinary income | Rarely |
| Unrecaptured Section 1250 gain | The straight-line depreciation not already recaptured as ordinary income | Ordinary rate, max 25% | Yes, almost always |
The Form 4797 instructions say Section 1250 ordinary recapture does not apply to 27.5-year residential rental property or 39-year nonresidential real property placed in service after 1986 under MACRS, so you are not required to calculate additional depreciation for them. For those buildings, line 26g of Form 4797 is zero, and all of the building's depreciation that shows up in the gain becomes unrecaptured Section 1250 gain.
Cost-segregated components are different. The 5- and 7-year parts are Section 1245 property, recaptured at ordinary rates. Bonus or accelerated depreciation on 15-year land improvements is Section 1250 "additional depreciation," also ordinary, and it shows up on line 26g. See the pillar guide to depreciation recapture for all three layers side by side.
How to calculate unrecaptured Section 1250 gain
For a building sold outright (not on the installment method), the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions works like this:
- Take the smaller of the depreciation allowed or allowable on the building (Form 4797, line 22) or the total gain on the building (line 24).
- Subtract any Section 1250 ordinary recapture (line 26g, usually zero).
- The result is that property's unrecaptured Section 1250 gain.
- Add amounts from installment sales (Form 6252), K-1s from partnerships and S corporations, and REIT or fund distributions.
- The total cannot exceed your net Section 1231 gain for the year (§1(h)(6)(B)), and prior-year §1231 losses recaptured on Form 4797, line 8 reduce it.
The final number goes to Schedule D, line 19.
Simple example. You bought a rental building for $450,000 plus $100,000 for the land. You took $150,000 of straight-line depreciation. You sell the building portion for $620,000 after selling costs. The building's adjusted basis is $300,000, so its gain is $320,000. Unrecaptured Section 1250 gain is the smaller of $150,000 or $320,000: $150,000. The other $170,000 of building gain, plus any gain on the land, is taxed at 0%, 15% or 20%.
"Allowed or allowable" matters. If you skipped depreciation in some years, the basis still drops by the amount you could have taken, and that amount still counts here.
How it is taxed: 25% is a ceiling
The 25% rate is a maximum, not a flat rate. Under §1(h) and the Schedule D Tax Worksheet, unrecaptured Section 1250 gain is taxed at ordinary rates to the extent your ordinary income plus that gain stays within the 24% bracket ($403,550 of taxable income, married filing jointly, 2026). Only the part above that line is taxed at 25%, and the total can never exceed the tax you would pay if the whole amount were ordinary income.
Simple example: two couples, same gain. Each couple (married filing jointly, 2026 brackets from Rev. Proc. 2025-32) sells a rental with a $150,000 gain, all of it unrecaptured Section 1250 gain.
- Couple A has $40,000 of other taxable income. Federal tax on the $150,000 is $26,920, an effective 17.9%. Part is taxed at 12% and part at 22%; none reaches 25%.
- Couple B has $450,000 of other taxable income. Federal tax on the $150,000 is $37,500, exactly 25%.
The same $150,000 costs Couple B about $10,580 more. That spread is why the timing of a sale, and whether the gain arrives in one year or several, can matter as much as the rate itself.
Two more layers can apply:
- Net investment income tax. If the rental was passive, the gain is net investment income. The 3.8% tax applies to the lesser of net investment income or modified AGI over $250,000 (joint) under §1411. See net investment income tax on a rental sale.
- State tax. California taxes all capital gain as ordinary income, so the 25% federal cap has no state equivalent there.
What reduces it
Capital losses. Net short-term capital losses and long-term capital loss carryovers reduce 28% gain first, then unrecaptured Section 1250 gain, then 0/15/20% gain (§1(h)(4)(B), (h)(6)(A)). So a loss carryforward can come off the 25% layer before the 15% layer. A current-year long-term loss, by contrast, generally reduces the 0/15/20% layer first.
Section 1231 losses. Unrecaptured Section 1250 gain from §1231 property cannot exceed net §1231 gain (§1(h)(6)(B)). A §1231 loss in the same year, including one released from a passive activity, can shrink the 25% layer.
Freed passive losses. When you sell your entire interest in a passive rental, suspended losses are freed (§469(g)). They reduce ordinary income first. They reach the capital gain layers only after ordinary income is used up (§1(h)). See suspended passive losses when you sell and installment sales and passive losses.
Unrecaptured Section 1250 gain on an installment sale
This is where it differs most from ordinary recapture. Ordinary §1245 and §1250 recapture is taxed in the year of sale even on an installment sale (§453(i)). Unrecaptured Section 1250 gain is not "recapture income," so it is reported on the installment method. But Reg. §1.453-12 says it is taken into account before the lower-rate gain in each payment.
Simple example. You sell a building for $1,000,000 with an adjusted basis of $400,000, after $150,000 of straight-line depreciation. There is no mortgage. Gain is $600,000, so your gross profit percentage is 60%. The buyer pays $200,000 down and $80,000 of principal a year for ten years.
Year Principal received Gain (60%) Unrecaptured §1250 0/15/20% gain 1 $200,000 $120,000 $120,000 $0 2 $80,000 $48,000 $30,000 $18,000 3 to 11 $80,000 each $48,000 each $0 $48,000 each The whole up-to-25% layer is reported in the first two years, but it is still spread, and the year-one amount is $120,000 instead of $150,000.
Spreading the layer can keep more of it in lower brackets, as the two-couples example shows. Interest on the note is ordinary income, and the installment rules have their own traps (the §453A interest charge above $5 million of notes, related-party rules). The ISC guide to installment sale depreciation recapture covers the Form 6252 mechanics, and you can model the payments in the free calculator.
Unrecaptured Section 1250 gain in a 1031 exchange
In a full like-kind exchange, no gain is recognized, so no unrecaptured Section 1250 gain is reported. The depreciation carries into the replacement property through its carryover basis (§1031(d)) and comes back when you eventually sell for cash.
If you receive boot, it is taxed up to your gain, and on a depreciated building the recognized gain is generally treated as unrecaptured Section 1250 gain before plain capital gain. Boot often lands on the up-to-25% layer. See 1031 exchange depreciation recapture and the Form 8824 guide.
Where it is reported
| Step | Form |
|---|---|
| Building's gain, depreciation and any §1250 ordinary recapture | Form 4797, Part III (lines 20 to 26g) |
| Remaining §1231 gain | Form 4797, Part I, then Schedule D |
| Installment payments | Form 6252, then Form 4797 |
| 25% layer computed | Unrecaptured Section 1250 Gain Worksheet, Schedule D line 19 |
| Tax computed | Schedule D Tax Worksheet |
The Form 4797 guide walks through a rental sale line by line. Partnership and S corporation owners get the figure on their K-1 as "unrecaptured section 1250 gain."
Bottom line
Unrecaptured Section 1250 gain is the straight-line depreciation inside your real estate gain. It is capital gain taxed at your ordinary rate up to 25%, not ordinary recapture, and for most modern rentals it is the main recapture you will see. It is taxed first out of installment payments, deferred in a full 1031, reduced by capital loss carryforwards and §1231 losses, and generally cleared at death through the basis step-up. Know the number before you set the price and the payment schedule. The free book shows how sellers line up this layer with suspended passive losses.
Questions to ask your CPA
- What is my total depreciation allowed or allowable on the building, and did we miss any years?
- How much of my depreciation is on cost-segregated §1245 components instead of the building?
- At my income, how much of the unrecaptured Section 1250 gain will actually be taxed at 25%?
- Do I have capital loss carryforwards or §1231 losses that will reduce the 25% layer?
- Do I have net §1231 losses in the last five years that change the calculation?
- If I sell on a note, how much of the 25% layer lands in each of the first few years?
- Does the 3.8% net investment income tax apply to my gain?
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Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.