The following discussion of the tax consequences, should you decide to sell depreciable real estate at a gain, assumes that:

 (1) your income, other than amounts treated as capital gain, is taxed at a marginal rate of at least 25%, and;

 (2) the real estate sold is the only business asset you sold in the tax year of the sale.

Generally, the gain from the sale by a noncorporate taxpayer of real estate that is a capital asset (or is used in a business) and is held more than 12 months isn't taxed at a rate higher than 15%.

But a more complex set of rules comes into play when the asset sold is depreciable real estate. In that case, a maximum rate of 25% will apply to what's called unrecaptured section 1250 gain and a maximum rate of 15% will apply to the balance of the gain. “Unrecaptured section 1250 gain” refers to the portion of gain that is eligible for capital gain treatment even though it is attributable to previously allowable depreciation. A further complication is that the portion of the gain that is unrecaptured section 1250 gain depends, as shown below, on when the property was placed in service.

Property placed in service after 1986. For real estate placed in service after 1986, all depreciation deductions allowable before the sale of the real estate give rise to unrecaptured section 1250 gain.

Thus, if you sell, at a gain of $200,000, a building on which $90,000 of depreciation deductions were allowable to you through the time of sale, $90,000 of the gain is unrecaptured section 1250 gain that will be taxed at a rate of 25%. The remaining $110,000 of the gain will be taxed at a rate of 15%.

Property placed in service before 1987 and after 1980. For real estate placed in service before 1987, but after 1980 (pre-1987 realty), the treatment of gain on sale depends on whether the real estate is residential or nonresidential.

Residential real estate. If you depreciated residential pre-1987 realty using just straight line depreciation, the tax results if you sell it will be the same as for a sale of post-1986 property, as described above.

But if (as was possible) you, at any time, used a declining balance method to depreciate the real estate, the gain on sale would be taxed as follows:

 gain, to the extent of the depreciation claimed that exceeds what would have been allowable under straight-line depreciation, will be recaptured as ordinary income, and, thus, taxed at rates as high as 35% (“ordinary income rates”) (but the amount of excess depreciation subject to recapture may be less for certain low-income housing).

 gain, to the extent of the depreciation that isn't recaptured as ordinary income, will be taxed at a rate of 25%.

 the balance of the gain will be taxed at a rate of 15%.

Nonresidential real estate. As is the case for residential pre-1987 realty, if you depreciated nonresidential pre-1987 realty using just straight-line depreciation, the tax results if you sell it will be the same as for a sale of post-1986 property, as described above. But if, as was possible, you, at any time, used a declining balance method to depreciate the realty, the gain on sale would be taxed as follows:

 gain, to the extent of the full amount of depreciation allowable to the time of sale, would be recaptured as ordinary income, and, thus, taxed at ordinary income rates;

 the balance of the gain would be taxed at a rate of 15%.

Pre-1981 property. The following rules apply if you sell real estate placed in service before 1981:

 the excess of depreciation claimed over straight-line depreciation is recaptured as ordinary income, and, thus, taxed at ordinary income rates (but the amount of excess depreciation subject to recapture may be less for certain residential real estate or for real estate acquired before 1970).

 gain, to the extent of the balance of depreciation allowable, is unrecaptured section 1250 gain, taxed at a rate of 25%.

  the balance of the gain, if any, would be taxed at a rate of 15%.