Updated July 30, 2026. Quick answer (2026): Depreciation taken after May 6, 1997 is never excludable under Section 121(d)(6) and is taxed as unrecaptured Section 1250 gain at up to 25%. It applies whether or not the deduction was actually claimed.
Recapture is predictable, which means it is plannable.
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The slice of gain the exclusion can never reach
Section 121(d)(6) is short and absolute: the exclusion “shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments … attributable to periods after May 6, 1997.” However long you lived there, however comfortably you clear the two-of-five test, the depreciation you took is taxable.
It is taxed at up to 25 percent, not at your capital gain rate
The recaptured portion is unrecaptured Section 1250 gain, which carries a maximum rate of 25 percent — higher than the 15 percent most sellers assume applies to the whole thing. On $90,000 of prior depreciation that is $22,500, on a sale where the rest of the gain may be fully excluded and the seller expected to owe nothing.
Allowed or allowable
The amount recaptured is the depreciation allowed or allowable. A landlord who never claimed depreciation on a rental still generally has it recaptured, because it was allowable. This is the harshest feature of the rule and the one that most often surprises an owner who thought skipping the deduction avoided the consequence.
And it still counts as net investment income
The recaptured slice feeds the 3.8 percent net investment income tax base under Section 1411 even when the rest of the gain is excluded. A couple with $300,000 of MAGI and $90,000 of recapture pays 25 percent on the recapture and 3.8 percent on the $50,000 by which their MAGI exceeds the $250,000 joint threshold — $24,400 in total, on a sale whose remaining $294,000 of gain was entirely covered by the exclusion.
Related
Methodology
- Exclusion caps, the 2-of-5 test, the nonqualified-use allocation, the reduced-exclusion fraction and the depreciation carve-out are taken from the text of 26 U.S.C. 121. The 3.8 percent rate and its thresholds are from 26 U.S.C. 1411. Both were read on 2026-07-30.
- Section 121 caps and Section 1411 thresholds are written in the statute as fixed dollar amounts with no indexing mechanism, so they are built in. Long-term capital gain brackets ARE indexed annually, so your rate is an input rather than a lookup.
- Figures were computed by two independently written engines that agree to the cent, and the calculator on this page reproduces both exactly.
- Federal only. State treatment varies and some states do not follow the federal exclusion.
Educational estimate, not tax advice, and not a filed return. Federal only. Confirm anything that changes a filing decision with a CPA or tax attorney.
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