Depreciation recapture is IRS requirement to pay back tax benefits from depreciation deductions when selling business property for more than adjusted basis. 2025 tax treatment: (1) Section 1245 (personal property/equipment) - all depreciation recaptured as ordinary income at 10-37% rates, (2) Section 1250 (real estate) - only excess over straight-line recaptured at 25% "unrecaptured Section 1250 gain", (3) Remaining gain taxed as long-term capital gains 0-20%.

Example: $500k rental property, $400k original cost, $100k depreciation → $400k basis.

Sell for $550k = $150k gain.

Split: $100k @ 25% (recapture) + $50k @ 15-20% (LTCG).

Key differences (2025): Section 1245 (equipment/vehicles/furniture) - ALL depreciation recaptured as ordinary income (10-37% tax rate).

Example: $50k truck, depreciated to $20k, sell for $45k → $30k depreciation + $15k gain = both taxed as ordinary income.

Section 1250 (buildings/rental property) - only excess depreciation over straight-line method recaptured.

Most real estate uses straight-line, so recapture limited to "unrecaptured Section 1250 gain" at 25% max rate, not ordinary 37%.

Example: $1M rental, $364k straight-line depreciation (27.5yr), sell for $1.2M → $364k @ 25% + $200k gain @ 15-20% LTCG.

Section 1250 more favorable for real estate investors.

Adjusted Basis = Original Cost + Capital Improvements - Accumulated Depreciation. 2025 example: Buy rental property $400k (2015), capital improvements $50k (new roof 2020, HVAC 2023), accumulated depreciation $145k (10 years × $14.5k/yr) → Adjusted Basis = $400k + $50k - $145k = $305k.

Sell for $550k → Total gain = $245k.

Split: $145k unrecaptured Section 1250 gain (depreciation) @ 25%, $100k LTCG ($550k-$450k original cost+improvements) @ 15-20%.

Track improvements carefully: repairs are deductible (ordinary), improvements increase basis (reduce recapture).

Form 4562 depreciation records + receipts required for audit defense.

Yes! 1031 like-kind exchange defers depreciation recapture and capital gains indefinitely if done correctly (2025 rules): Must exchange for "like-kind" real estate (residential-to-commercial OK, but not personal property), use qualified intermediary (cannot touch sale proceeds), identify replacement within 45 days, close within 180 days, replacement value ≥ sale price, reinvest all equity.

Example: Sell $500k rental (basis $300k, $200k gain), exchange for $600k property → No tax due, $300k basis carries over to new property (depreciation clock resets at $600k).

Partial exchange: If take $50k cash "boot" → Recapture triggered on $50k only.

Death planning: Heirs get step-up in basis to FMV, erasing all deferred recapture (IRC Section 1014).

2025 recapture rates: (1) Section 1245 - Ordinary income rates 10-37% based on tax bracket (applies to equipment/vehicles/personal property), (2) Section 1250 unrecaptured gain - 25% flat rate (applies to straight-line depreciation on real estate), (3) Excess Section 1250 (accelerated over straight-line) - 25%, but rare since most real estate uses straight-line post-1986, (4) Remaining long-term capital gain - 0% (<$47,025 single/<$94,050 married), 15% ($47,025-$518,900/$94,050-$583,750), 20% (above thresholds), (5) Net Investment Income Tax (NIIT) - additional 3.8% if MAGI >$200k single/$250k married.

Total max: 25% + 3.8% = 28.8% on recapture, 20% + 3.8% = 23.8% on LTCG.

2025 filing requirements: (1) Form 4797 Sale of Business Property - report sale price, adjusted basis, gain calculation, split recapture vs capital gain (Part I for Section 1231 property, Part II for ordinary assets, Part III for Section 1250 recapture), (2) Schedule D - report LTCG portion from Form 4797 line 11, (3) Form 8949 - if required for capital asset details, (4) Form 1040 Schedule 1 - ordinary income from Section 1245 recapture flows here, (5) Form 4562 - reference accumulated depreciation from prior years.

Keep records: depreciation schedules, improvement invoices, closing statements (HUD-1/settlement), appraisals, Form 1099-S from buyer.

State taxes: Most states follow federal recapture rules but some (CA/NY/NJ) have different rates or treatment - consult CPA for multistate sales.