How do you calculate the tax rate for unrecaptured 1250 gains in 2025?

Thanks for explaining but I'm still confused. Does this mean if I sell the property for $150k more than I bought it for, but I've taken $78k in depreciation, then $78k is taxed at 25% and the remaining $72k is taxed at LTCG rates? Or is it more complicated? Also, does the 3.8% NIIT apply on top of these rates? I expect to be over the threshold.

Yes, that's correct! If your total gain is $150K and you've taken $78K in depreciation, then $78K would be taxed as unrecaptured section 1250 gain at a maximum of 25%, and the remaining $72K would be taxed at your applicable long-term capital gains rate (either 0%, 15%, or 20% depending on your income level). Regarding the Net Investment Income Tax (NIIT), yes, the 3.8% NIIT would potentially apply on top of these rates if your modified adjusted gross income exceeds the threshold ($200,000 for single filers or $250,000 for married filing jointly in 2025). The NIIT applies to investment income, which includes capital gains from the sale of rental property.

Does this work for commercial properties too? I've got a small office building I'm selling and the depreciation recapture is giving me nightmares. My accountant quoted me $1200 just to do these calculations!

I'm skeptical about these online tools. How accurate is it really? I had TurboTax mess up my rental property calculations before and ended up with a nasty letter from the IRS. Does it handle different scenarios like partial business use or cost segregation studies?

Yes, it absolutely works for commercial properties! The system actually has special templates for different property types including office buildings, retail spaces, and mixed-use properties. It handles all the different depreciation schedules and recapture rules. Regarding accuracy, I was skeptical too after getting burned by generic tax software. The difference is that taxr.ai is specifically designed for real estate investors and handles all the complex scenarios. It definitely supports cost segregation studies - it actually helped me understand which components of my property qualified for different treatment. You can even run multiple what-if scenarios to compare different selling strategies before committing.

Wait, how does this actually work? You're saying they somehow get you to the front of the IRS phone queue? That sounds impossible - I've literally spent days on hold before giving up.

Yeah right. Nobody gets through to the IRS these days. If this actually worked, everyone would be using it. I'm calling BS - probably just another scam service that takes your money and gives you nothing.

It uses a technology that continuously calls the IRS for you and navigates the phone tree until it connects, then it calls you and connects you directly to the agent. No more sitting on hold for hours! It's basically like having a robot assistant keep calling until they get through. I was exactly as skeptical as you are. I thought it sounded too good to be true, but I was desperate after trying for over two weeks to get through. The service literally called me back when an agent was on the line. I spoke with a very helpful IRS representative who clarified exactly how to report my unrecaptured section 1250 gain on Form 8949 and Schedule D.

Wait, so if I did a cost segregation study and depreciated things like carpeting, appliances, etc. faster, those items get taxed at my normal income rate rather than 25%? That seems like it could really impact whether cost segregation is worth it long term. Can you explain a bit more about how you figure out which is which when you sell?

That's exactly right. Only the straight-line depreciation taken on the actual building structure (39-year property for commercial, 27.5-year for residential) gets the benefit of the 25% rate as unrecaptured section 1250 gain. For figuring it out, you need to track your depreciation by property type. When you sell, you'll need to go back through all your depreciation schedules and separate out how much was taken on the building (section 1250 property) versus how much was taken on the personal property components identified in your cost segregation study (section 1245 property). Your cost seg report should have broken these out for you. The section 1245 property recapture gets taxed at ordinary income rates, which could be as high as 37% in 2025. This is why some people decide against cost segregation if they plan to sell within a few years after doing it - the tax deferral benefit might be outweighed by the higher recapture rate later.

I used it last year and it's actually simpler than it looks. The 28% rate gain stuff isn't applicable for most people (it's for collectibles and certain small business stock). You can basically ignore those lines if you don't have those types of gains. Focus on the lines that calculate how much of your depreciation is recaptured at 25% and how much of your remaining gain gets the LTCG treatment. The main thing is making sure you input your total depreciation taken correctly on the appropriate line.

This is really helpful perspective on the timing considerations! I hadn't thought about the installment sale option - that could be a game changer for spreading out the tax impact. Quick question: if I do an installment sale, does the unrecaptured section 1250 gain get spread out proportionally over the installment payments, or does it all get recognized in the first year? I'm wondering if that strategy would actually help with the 25% rate portion or just the regular capital gains portion. Also, regarding state taxes - I'm in California which definitely taxes capital gains as ordinary income. So you're right that my effective rate on that $78k could be much higher than 25% when you add in state taxes plus potentially the NIIT. This is making me think I should definitely run some projections before deciding on timing.

Great question about installment sales! The unrecaptured section 1250 gain does get spread out proportionally over the installment payments, which can be a significant tax planning advantage. So if you're receiving payments over 3 years, roughly one-third of that $78k would be recognized each year at the 25% rate rather than taking the full hit in year one. However, there's an important catch - if you have depreciation recapture from prior years, that portion must be recognized in the year of sale regardless of the installment method. But for most residential rental properties, this usually isn't an issue since you're typically dealing with straight-line depreciation. For California, you're absolutely right to be concerned. CA's top rate is 13.3% (including the mental health tax), so your effective rate on that unrecaptured gain could be close to 42% when you add federal 25% + CA 13.3% + potentially 3.8% NIIT. An installment sale could help keep you in lower brackets each year and potentially avoid some of the NIIT threshold issues. Definitely worth running projections with different scenarios - it might save you tens of thousands in taxes!

This is such great advice about organizing depreciation schedules! I learned this the hard way when I had to amend a return because I missed some depreciation from a year when my previous accountant didn't file properly. One thing I'd add - if you've ever claimed bonus depreciation or Section 179 deductions on any property improvements, those amounts are subject to different recapture rules too. For example, if you took bonus depreciation on a new HVAC system, that portion gets recaptured at ordinary income rates rather than the 25% unrecaptured section 1250 rate. Also, regarding Publication 544 - the examples in there are incredibly helpful, but they can be a bit outdated. The tax rates and thresholds change, but the calculation methodology stays the same. I found it useful to work through their examples with current tax year rates to make sure I understood the concepts correctly. Has anyone dealt with mixed-use properties where part was rental and part was personal residence? I'm curious how the depreciation recapture calculation works when you have to allocate between business and personal use portions.

This is exactly the kind of detailed guidance I was hoping to find! The allocation based on usage percentage makes perfect sense, but I can see how tracking this over multiple years could get really complicated. I'm curious about one specific scenario - if you convert a personal residence to a rental property partway through ownership, do you only start the depreciation recapture clock from the conversion date? Or does the IRS somehow factor in the entire ownership period? Also, for the duplex situation you mentioned, did you have to get separate depreciation schedules for each unit, or could you treat it as one property with 50% business use? I'm asking because I'm considering a similar arrangement and want to make sure I set up my record-keeping correctly from day one. Thanks for mentioning Publication 527 - I'll definitely check that out along with 544. It sounds like having a solid system for tracking usage percentages and maintaining detailed records is absolutely critical for these mixed-use situations.

Great questions! For personal residence to rental conversions, you only start the depreciation (and future recapture) clock from the conversion date. The years you lived in it as your personal residence don't count toward depreciation recapture since you couldn't take depreciation deductions during that period. However, there's an important catch with the Section 121 exclusion. If you lived in the property as your main home for 2 of the last 5 years before selling, you might be able to exclude up to $250k ($500k if married) of the gain - but only the portion allocable to personal use. The rental portion doesn't qualify for the exclusion. For the duplex setup, I treated it as one property with 50% business use rather than separate schedules for each unit. This simplified the record-keeping significantly. I just had to consistently apply the 50% allocation to all depreciation, expenses, and eventually the recapture calculation. The key is picking a reasonable allocation method (square footage, number of rooms, etc.) and sticking with it consistently. One tip: if you're planning this arrangement, take detailed photos and measurements when you start renting to document the business use percentage. The IRS loves documentation, and having clear evidence of your allocation method from day one will save headaches later.

This is such a crucial point that I think gets overlooked by a lot of people! The carryover of depreciation recapture through 1031 exchanges can really catch you off guard if you're not tracking it properly. I'm wondering - when you discovered that additional $30k in carried-over depreciation, how did you go about reconstructing that history? Did you have to go back through all the exchange documentation from previous properties, or is there a simpler way to track this? Also, for someone like the original poster who is considering whether to sell now or wait another year, would doing a 1031 exchange potentially be a better strategy than an outright sale if they want to continue investing in real estate? It seems like it could defer not just the regular capital gains but also that $78k in unrecaptured section 1250 gain that would otherwise be taxed at 25%. The complexity of tracking depreciation through multiple exchanges sounds like it could get really messy over time though. Do you have any tips for maintaining good records to avoid surprises down the road?

You bring up an excellent point about 1031 exchanges! To reconstruct the depreciation history, I had to go back through all my exchange documentation, including the settlement statements and depreciation schedules from each property in the chain. My accountant helped trace it back through three different properties over about 8 years. It was tedious but necessary. For @ApolloJackson, a 1031 exchange could definitely be worth considering if you want to stay in real estate. You're right that it would defer both the regular capital gains AND the $78k unrecaptured section 1250 gain. The key is that you have to identify replacement property within 45 days and close within 180 days of your sale. For record-keeping going forward, I now maintain a "depreciation trail" spreadsheet that tracks the original basis, accumulated depreciation, and any carryover amounts from each property in my exchange chain. I also keep all exchange documents in a dedicated file - you'll need them eventually when you sell for cash. The complexity does build over time, but the tax deferral benefits can be huge if you're planning to hold real estate long-term. Just remember that the depreciation recapture will eventually come due when you exit the exchange chain, and rates could be different (hopefully lower!) when that time comes.

Great question about inherited property! You're in luck with the depreciation recapture issue - you only have to recapture the depreciation YOU'VE taken since inheriting the property, not what your parents took. The stepped-up basis you received when you inherited essentially "wiped clean" any depreciation recapture liability that had built up during your parents' ownership. So in your case, you'd only be looking at recapturing the 6 years of depreciation you've claimed since inheriting it, which should make your tax situation much more manageable than if you had to deal with potentially decades of prior depreciation. You're also correct about the holding period - inherited property automatically receives long-term capital gains treatment regardless of how long you've actually held it. This is a nice benefit that can save you from higher short-term capital gains rates if you sell relatively soon after inheriting. Just make sure you have good documentation of the stepped-up basis value from when you inherited the property (usually the fair market value at the date of death), as this will be crucial for calculating your actual gain when you sell. The IRS can be particular about having proper documentation for inherited property basis.

This is such a helpful real-world example! Your breakdown really clarifies how the calculations work in practice. I appreciate you mentioning the capital improvements aspect - I've been tracking my major improvements but wasn't sure how much detail I needed to keep. Quick question about the estimated tax payments you mentioned - do you need to make quarterly payments throughout the year even if the property sale happens late in the year? I'm planning to sell in Q4 of 2025, so I'm wondering if I should start making estimated payments earlier in the year to avoid underpayment penalties, or if I can just make one large payment when I file my return. Also, thanks for sharing the state tax impact - that 34% effective rate really drives home how much the state taxes can add to the burden. I need to run similar numbers for my state to get a realistic picture of the total tax cost.