Taxes for sellers · IRS Publications 527 and 544Selling a rental property: depreciation recapture and the taxes on the gain

A residential rental building is depreciated over 27.5 years under the general system, and every year of depreciation reduces the owner's basis – including depreciation the owner was allowed to claim but didn't (IRS Publication 527; Publication 544 uses the words 'allowed or allowable'). When the property is sold, the gain is the amount realized minus that adjusted basis, so years of depreciation make the gain larger. The building is section 1250 property: gain is treated as ordinary income only to the extent of 'additional depreciation' – depreciation beyond the straight-line method, or all depreciation if the property was held a year or less – so a rental depreciated straight-line and held over a year usually has none. The part of the long-term gain that comes from depreciation is 'unrecaptured section 1250 gain', figured on its own worksheet in the Schedule D instructions and taxed at no more than 25%; for 2025 the maximum capital gains rates are 0%, 15%, 20%, 25% and 28%. The sale of rental real property is reported on Form 4797. A former rental that later became the owner's main home follows the home sale rules (see the home sale guide), and a 1031 exchange can defer the tax.