What's the formula to calculate tax rate for unrecaptured Section 1250 gains?

This is really helpful, but I'm a bit confused still. Does the 25% rate apply regardless of your tax bracket? Like if my normal long-term capital gains rate would be 15%, does the unrecaptured 1250 gain portion still get taxed at the full 25%?

The 25% rate is a maximum rate, so it applies regardless of your regular income tax bracket. Even if you're in a lower tax bracket, the unrecaptured Section 1250 gain is still taxed at up to 25%. If you're normally in the 15% capital gains bracket, you'll still pay up to 25% on the depreciation recapture portion ($68,000) while paying 15% on the remaining capital gain ($192,000). That's why it's called a "maximum" rate - it's not progressive like regular income tax brackets.

I've never heard of this before. Does it actually connect to tax software or do you just get a report you have to manually enter? My sale was kind of complicated because I did some improvements right before selling.

I'm hesitant to try another tax tool. How is this different from just asking my CPA to figure out the depreciation recapture? Seems like something they should know how to do already, right?

It doesn't directly connect to tax software, but it gives you a detailed report showing exactly what goes on each line of Form 4797 and Schedule D. I found this really helpful because I could just follow along while entering the info in TurboTax. As for being different from a CPA, I found it was a lot cheaper and faster than what my accountant quoted me. Plus, I learned about some improvements I had made that could offset some of the recaptured depreciation. Not all CPAs are specialists in real estate investment taxes, so having something that specifically focuses on this was useful. It helped me understand what was happening rather than just blindly paying someone.

Wait, you can actually get through to the IRS? How much did this service cost? I've been on hold with them about my Section 1250 gains calculation for literally 3+ hours multiple times.

This sounds fake honestly. I don't believe any service can magically get you through the IRS phone tree. They're deliberately understaffed to make it impossible to get help. What's the catch here?

The service doesn't actually bypass the IRS queue - it just waits in it for you. So instead of you personally being on hold for hours, their system holds your place and then calls you when an agent is about to pick up. They don't have a special backdoor to the IRS or anything like that. I was skeptical too before trying it. The thing is, I needed some very specific answers about how my partial-use property depreciation recapture would be calculated, and online forums had conflicting information. Getting an actual IRS tax law specialist to review my specific situation was worth it to me. Not going to lie, it felt amazing to finally talk to someone after weeks of failed attempts.

That's interesting about cost segregation. I never did that with my 4-unit, but now I'm wondering if I should have. Does the recapture calculation get way more complicated when you've done cost segregation? And what tax forms do you use for the personal property components recapture?

The recapture calculation definitely gets more complex with cost segregation, but the tax savings during ownership often outweigh the complexity and higher recapture rates later. For personal property components, you still use Form 4797, but different sections - Part II for the personal property (subject to ordinary income rates) and Part III for the building component (subject to the 25% maximum rate). It's generally worth it for larger properties, especially if you plan to hold for at least a few years. The accelerated depreciation provides significant tax sheltering during the ownership period. Just be prepared for more complex reporting when you sell, and understand that the personal property components don't get the benefit of the 25% maximum rate cap.

You're not completely off base. Yes, the depreciation recapture (unrecaptured Section 1250 gain) is taxed at up to 25%, which is higher than the typical 15% long-term capital gains rate. However, there are ways to potentially defer or reduce this: 1. You could do a 1031 exchange into another investment property to defer all the gain including the recapture 2. If you convert the property to your primary residence and meet certain requirements, you might be able to exclude some gains (though the recapture portion is still typically taxable) 3. Opportunity Zone investments can also provide ways to defer and potentially reduce capital gains

Thanks for explaining! I've heard of 1031 exchanges but thought they were just for big commercial properties. So it would work for my little duplex too? And does doing that exchange mean I never have to pay the recapture tax, or just delay it?

1031 exchanges absolutely work for smaller properties like duplexes! There's no minimum size requirement. You're essentially swapping your property for a "like-kind" investment property of equal or greater value. The key thing to understand is that a 1031 exchange defers the tax rather than eliminating it permanently. Your depreciation recapture and capital gains get rolled into the basis of your new property. So if you eventually sell that new property without doing another exchange, you'll owe recapture tax on the depreciation from both properties. However, many investors use this strategy to keep rolling their gains forward indefinitely, and if you hold until death, your heirs get a "stepped-up basis" which can essentially eliminate the deferred taxes. Just make sure you work with a qualified intermediary and follow the strict timing rules (45 days to identify replacement property, 180 days to close).

Great question about inherited property! You're correct that the stepped-up basis when you inherited the property in 2019 essentially "resets" your depreciation recapture liability. You'll only owe the 25% unrecaptured Section 1250 gain rate on the depreciation YOU have taken since inheriting it, not any depreciation your grandmother claimed before you inherited it. This is one of the major tax advantages of inheriting investment property versus receiving it as a gift. The stepped-up basis eliminates the previous owner's accumulated depreciation for recapture purposes. So if you've been depreciating the property for about 5 years since 2019, you'll only be subject to recapture on that amount when you sell. Just make sure to keep good records of the property's fair market value at the time of inheritance (which became your basis) and all the depreciation you've claimed since then. This will make the calculation much cleaner when it's time to file.

This is such a great point about capital improvements! I'm actually in a similar boat - bought a small apartment building in 2019 and have done several major renovations. I kept all the receipts but wasn't sure how they factored into the depreciation recapture calculation. Quick question though - do smaller improvements like painting, carpet replacement, or appliance upgrades count toward reducing recapture? Or does it have to be major structural stuff like roofs and electrical systems? I probably have another $15,000 in what I'd call "maintenance improvements" but I'm not sure if those qualify for basis adjustments or if they were just regular deductible expenses. Also, do you happen to know if there's a minimum dollar threshold for improvements to count? Thanks for sharing this insight - it could potentially save me quite a bit!