Unrecaptured Section 1250 Gain

Unrecaptured Section 1250 Gain refers to the portion of gain from the sale of depreciable real property that is subject to a maximum tax rate of 25% when the property is sold for more than its adjusted basis. This gain arises from the depreciation deductions taken on the property, specifically for residential rental property and non-residential real property that has been depreciated under the Modified Accelerated Cost Recovery System (MACRS).

When a property is sold, any gain attributable to depreciation taken (up to the amount of gain recognized) must be recaptured as unrecaptured Section 1250 gain. This is distinct from other types of capital gains, which may be taxed at different rates depending on holding periods and types of assets. For example, if a taxpayer sells an apartment building for $1,000,000, having depreciated it to a basis of $700,000, the gain of $300,000 may be subject to unrecaptured Section 1250 gain rules, resulting in a tax rate of up to 25% on the portion of the gain attributable to depreciation.