Depreciation is a deduction you enjoy for years and pay back when you sell. How much comes back, and at what rate, depends on whether the asset is equipment or a building.
This guide explains sections 1245 and 1250, additional depreciation, the 25% maximum rate, and works through an equipment sale. It follows IRS Publication 544 (the 2025 revision, for 2025 returns, the latest the IRS had posted when checked) and IRS Topic 409; real estate investors should also read our capital gains tax hub.
Depreciation lowers your taxable income while you own an asset. When you sell, the IRS takes some of that benefit back: you may have to report the recognized gain as ordinary income from depreciation recapture. The rules differ for equipment (section 1245 property) and buildings (section 1250 property).
| Property | Rule | Source |
|---|---|---|
| Section 1245 property | A gain on the disposition is treated as ordinary income to the extent of depreciation allowed or allowable on the property | IRS Pub. 544 |
| Section 1250 property | A gain is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property | IRS Pub. 544 |
| Unrecaptured section 1250 gain | The portion from selling section 1250 real property is taxed at a maximum 25% rate | IRS Topic 409 |
Section 1245 property also now includes qualified production property, if designated and elected under section 168(n) and placed in service after July 4, 2025 (added by Public Law 119-21, the One Big Beautiful Bill Act), according to Pub. 544.
If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight-line method. If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation.
You will not have additional depreciation if, for example, the property was residential rental or nonresidential real property placed in service after 1986, you held it longer than 1 year, and, if it was qualified property, you made a timely election not to claim any special depreciation allowance (Pub. 544 lists other cases). In that case the ordinary-income recapture under section 1250 is zero; the depreciation is instead treated as unrecaptured section 1250 gain, taxed at a maximum of 25%. Use the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040) to figure it.
| Step | Amount |
|---|---|
| Purchase price of equipment | $10,000 |
| Depreciation claimed | $6,000 |
| Adjusted basis (cost minus depreciation) | $4,000 |
| Sale price | $9,000 |
| Gain (sale price minus adjusted basis) | $5,000 |
| Ordinary income from recapture (gain, limited to depreciation of $6,000) | $5,000 |
The whole $5,000 gain is below the $6,000 of depreciation claimed, so it is all treated as ordinary income. A gain above the depreciation claimed is not recapture; Pub. 544 treats it as section 1231 gain. The Form 4797 instructions send a section 1231 gain with no prior nonrecaptured section 1231 losses to Schedule D as a long-term capital gain (for property held more than one year).
Gain or loss on business property is generally reported on Form 4797, and any gain or loss on the part of a home used for business is ordinary gain or loss as applicable, reportable on Form 4797. Section 1231 gain that is treated as capital gain is carried from Form 4797 to Schedule D. For the capital gains side see our capital gains brackets guide, and for forms that come with a sale see our Form 8949 guide.
IRS Publication 544: Sales and Other Dispositions of Assets, IRS Topic no. 409: Capital gains and losses.