The 25% cap
Unrecaptured Section 1250 gain is taxed at your ordinary income rate but no more than 25%. If your ordinary rate is below 25%, you pay the lower rate; if it's above, the cap protects you at 25%.
State tax stacks on top
Many states tax the gain (including the recapture portion) as regular income with no special cap. In a high-tax state, your combined rate on the recapture slice can be meaningfully above 25%.
Net investment income tax
High-income sellers may also owe the 3.8% Net Investment Income Tax on the gain. Factor it in when estimating a large sale.
Frequently asked questions
Is the depreciation recapture rate always 25%?
No — 25% is the maximum. If your ordinary rate is lower, you pay that. State tax and the 3.8% NIIT can push the total higher.
Does the 25% apply to the whole gain?
No, only to the portion equal to depreciation claimed. The rest is long-term capital gain at 0/15/20%.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.