Section 1250 recapture is usually zero, and the depreciation history still decides the tax

A rental building is sold. Someone looks up §1250, finds that recapture applies to depreciation in excess of straight line, notes that MACRS depreciates real property straight-line, and concludes there is no recapture to worry about.

That conclusion is usually right and routinely taken too far. The ordinary-income recapture under §1250 is frequently zero. The amount of tax that turns on the accumulated depreciation figure is not.

The distinction is worth holding precisely, because it decides how much attention the prior years' depreciation records deserve — and for a building, those records may span three decades and several preparers.

Why the recapture is usually zero

§1250 recaptures the applicable percentage of additional depreciation, meaning depreciation allowed in excess of what the straight-line method would have produced over the same period.

Residential rental property and nonresidential real property placed in service after 1986 are depreciated under MACRS on a straight-line basis over 27.5 or 39 years. Straight-line depreciation produces no excess over straight line. With no additional depreciation, the §1250 ordinary-income recapture computes to nothing.

This is a genuine structural feature rather than an oversight, and it is why the §1250 regime feels toothless compared with the full reach of §1245 on equipment.

The 25% bucket is not recapture, and it reads the same figure

What survives is unrecaptured §1250 gain.

Under §1(h)(1)(E), gain on §1250 property attributable to depreciation — the straight-line depreciation that §1250 does not recapture as ordinary income — is taxed at a maximum rate of 25% rather than the ordinary long-term capital gain rate. It is a rate rule, not a characterisation rule, and it is not reported as ordinary income.

The practical consequence is that a building sold after twenty years of straight-line depreciation generates a substantial slice of gain taxed at 25%, and the size of that slice is exactly the accumulated depreciation figure. Nothing about "recapture is zero" reduces it.

So the depreciation history matters as much here as anywhere. It simply matters through a different line of the return.

Where additional depreciation does exist

The zero answer is a consequence of straight-line treatment, and straight-line is not universal on §1250 property. Two situations produce real additional depreciation and therefore real ordinary recapture.

Bonus depreciation on §1250 property. Qualified improvement property carries a 15-year recovery period and is eligible for the special depreciation allowance. Bonus is depreciation allowed, and claiming it puts depreciation ahead of the straight-line amount for that property. The excess is additional depreciation, and §1250 recaptures it as ordinary income on disposal. The same logic applies to other 15-year improvement categories where bonus was taken.

Pre-1987 property. Real property placed in service under ACRS or older regimes could be depreciated under accelerated methods. Buildings held that long are less common, and where they exist the additional depreciation may be significant.

The first of those is the one that makes this a live question rather than a historical one. A building's asset list frequently contains improvement assets with 15-year lives, and whether bonus was claimed on them is a fact about the past, recorded — or not recorded — on a depreciation schedule.

Allowed or allowable, across three decades

Recapture and unrecaptured §1250 gain are both measured against depreciation allowed or allowable: the amount that could properly have been taken, whether or not anyone took it.

For a 39-year asset that is a long exposure. A building acquired in 2005 has passed through however many preparers the client has used since, and each transition was a moment when the accumulated figure had to be carried across accurately. Under-depreciating in one of those years does not reduce the gain on sale, because the measure is what was allowable.

This is the practical reason a building's depreciation record deserves more scrutiny on client onboarding than an equipment list of the same length. The equipment will be disposed of in a few years and the error surfaces quickly. The building will sit in the file for twenty more.

What the schedule has to carry

For unrecaptured §1250 gain, the combined accumulated depreciation figure is what is needed, and any schedule that prints prior depreciation carries it.

For additional depreciation, it is not sufficient. Establishing that a 15-year improvement asset had bonus claimed on it requires the bonus component separately — and that is precisely the column some prints omit. Lacerte's summary depreciation schedule reports one combined prior depreciation figure with no separate prior §179 or prior special depreciation allowance columns. The components are not zero on that page; they are absent from it entirely.

Which means that for a §1250 asset, writing zero into a prior bonus column does more than record a missing fact incorrectly. It asserts that no bonus was claimed, which is the same as asserting there is no additional depreciation, which is the same as asserting the ordinary-income recapture on disposal is zero. That is a determination about a future return, made silently, years before anyone looks at it.

The honest handling is to carry the combined figure — which is correct and complete for the 25% computation — and to leave the component empty and marked, because an empty field states what the document actually supports.

What we do with it

Prior depreciation is transcribed as the schedule printed it and never re-derived, and the import file is blocked until the summed rows match the totals the document printed, per group and in grand total.

Where a print does not separate prior §179 and prior bonus, they come back empty and flagged as not present in the source rather than zeroed, and that flag blocks the download until a preparer resolves it deliberately. For a building's improvement assets that flag is doing real work: it is the difference between a file that records what the prior firm reported and a file that quietly claims the additional depreciation is nil.

The mechanics of the format are on the Lacerte fixed asset import page, and the wider picture of what a disposal reads from is the depreciation recapture guide.

FAQ

Is there section 1250 recapture on a rental property?

Usually none as ordinary income. §1250 recaptures only depreciation in excess of straight line, and residential rental property placed in service after 1986 is depreciated straight-line under MACRS, so there is typically no excess to recapture.

If §1250 recapture is zero, why does the depreciation matter?

Because unrecaptured §1250 gain still applies. Under §1(h)(1)(E) the portion of gain attributable to straight-line depreciation carries a maximum rate of 25% rather than the ordinary long-term capital gain rate, and that portion is the accumulated depreciation figure.

What is the difference between §1250 recapture and unrecaptured §1250 gain?

§1250 recapture characterises additional depreciation as ordinary income. Unrecaptured §1250 gain is not ordinary income at all — it is capital gain subject to a 25% maximum rate. One changes the character, the other changes the rate.

Can bonus depreciation create §1250 recapture?

Yes. Bonus is depreciation allowed, so claiming it on §1250 property such as a 15-year qualified improvement asset puts total depreciation above the straight-line amount. That excess is additional depreciation and is recaptured as ordinary income on disposal.

What if the prior schedule does not separate prior bonus?

Then the additional depreciation cannot be established from that page. The combined figure is still correct for the 25% computation, but the component has to come from the prior firm's client file or from prior years' Forms 4562, where the special depreciation allowance was reported in the year claimed.

Does under-depreciating a building reduce the gain on sale?

No. Both computations are measured against depreciation allowed or allowable, so depreciation that could properly have been taken counts whether or not it was claimed.