Depreciation Recapture

Depreciation generally reduces your tax basis by the amount allowed or allowable. That includes depreciation you were entitled to take, even if you missed the deduction. A lower adjusted basis can mean more taxable gain when you sell. Your original purchase price alone is therefore not enough to estimate the sale tax. [1]

For a building held longer than a year and depreciated only on a straight-line basis, ordinary Section 1250 recapture generally does not apply. But depreciation-related gain may still be unrecaptured Section 1250 gain. For individuals, that category carries a maximum federal rate of 25%, not an automatic flat 25% tax on all depreciation, all gain, or the sale price. The actual calculation depends on the taxpayer and applicable gain rules. [2][3]

Separately depreciated personal property, such as equipment, can produce ordinary-income recapture under Section 1245. The building and everything sold with it should not automatically receive the same treatment. [2]

Before deciding how much a sale leaves you to reinvest, ask your CPA for an adjusted-basis schedule and a sale-tax estimate that separates the gain categories. Include capital improvements and any earlier exchange history. That's a different calculation from the building's market value. The broker opinion of value guide explains the pricing side.