Unrecaptured Section 1250 Gain
Unrecaptured Section 1250 gain is the part of real estate gain from prior depreciation, taxed at a maximum federal rate of 25% rather than normal capital gains rates.
Definition
Unrecaptured Section 1250 gain is the specific slice of real estate profit attributable to the depreciation you deducted over the years, taxed at a maximum federal rate of 25%. It is the form depreciation recapture takes for real property under tax code Section 1250.
When you sell a depreciated building, your gain is split. The portion equal to accumulated depreciation is unrecaptured Section 1250 gain, taxed up to 25%, higher than the 0/15/20% long-term rates that apply to the rest of the gain (the appreciation above your original cost). If you claimed $150,000 of depreciation, that $150,000 can face up to 25% tax, while gain beyond your purchase price is taxed at ordinary capital gains rates.
This is a significant reason investors use 1031 exchanges: the exchange defers unrecaptured Section 1250 gain along with the rest, and a step-up in basis at death can eliminate it for heirs entirely.
Key points
- The depreciation portion of real estate gain
- Taxed at a maximum federal rate of 25%
- Higher than the 0/15/20% long-term capital gains rates
- Deferred by a 1031 exchange, erased by step-up at death
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.