Both — and which dollars land where is set by the kind of property the depreciation was taken on, not by how long you held it. When you sell a rental, the gain is sliced into three pieces at three different rates: Section 1245 recapture on reclassified personal property is ordinary income at your marginal rate, up to 37% federal; depreciation on the 27.5-year building comes back as unrecaptured Section 1250 gain at a maximum 25% federal rate; and anything above your original purchase price is long-term capital gain at 0%, 15% or 20%. A cost segregation study changes the size of those slices.
Which part of the gain is ordinary income?
Two pieces, and both of them trace back to the components a study carves out of the building:
• Section 1245 recapture on 5- and 7-year personal property — appliances, carpet and flooring, cabinetry, window treatments, decorative lighting, specialty electrical, and furnishings. Bonus depreciation usually drives the adjusted basis of these items to zero, so close to the entire amount allocated to them comes back as ordinary income. There is no 25% ceiling on this bucket.
• Excess Section 1250 recapture on 15-year land improvements — driveways, walkways, fencing, retaining walls, landscaping, site utilities. The ordinary piece is the depreciation claimed in excess of 15-year straight-line — after 100% bonus depreciation, most of it.
One limit: recapture is computed asset by asset and capped at the gain that asset actually realized, so it never exceeds the depreciation you took.
What is unrecaptured Section 1250 gain, and why is it capped at 25%?
Depreciation on the 27.5-year residential structure is recaptured as unrecaptured Section 1250 gain. It is taxed as a capital gain, but at a 25% ceiling rather than the 15% or 20% that applies to ordinary appreciation. "Maximum" is literal: if your ordinary bracket is below 25%, you pay the bracket rate instead, which is why a low-income sale year changes the arithmetic.
The 3.8% net investment income tax can sit on top of all three buckets, and state treatment varies. Neither changes the ordering, but both change the total.
A worked example: a $520,000 rental sold four years after a study
Take a $520,000 single-family rental acquired in 2026, land at roughly 20% of the price, leaving about $416,000 of depreciable basis. A documented study reclassifies about 23% of it — roughly $95,700 — into about $60,000 of 5- and 7-year personal property and $35,700 of 15-year land improvements. With 100% bonus depreciation available for property acquired (contract signed) and placed in service after January 19, 2025, the whole $95,700 is deductible in year one — about $30,624 of tax saved at a 32% marginal federal rate.
Now sell in 2030 for $610,000. Four years of depreciation on the remaining $320,300 of building basis is about $46,589. Here is how the gain splits:
• $60,000 of Section 1245 ordinary income. The personal property sits at a zero adjusted basis, so the full allocation recaptures. At 32%, about $19,200 of federal tax.
• $26,180 of excess Section 1250 recapture. Straight-line on the land improvements over four years would have been $9,520 against the $35,700 actually deducted, so the $26,180 difference is ordinary income — about $8,378 at 32%.
• $56,109 of unrecaptured Section 1250 gain — the $46,589 of building depreciation plus the $9,520 straight-line share of the land improvements, since land improvements are Section 1250 property and only the excess above straight-line turns ordinary. Taxed at the 25% ceiling, about $14,027.
• $90,000 of long-term capital gain, the appreciation above the $520,000 purchase price, at 15% — about $13,500.
So of $232,289 of total gain — a $610,000 sale against a $377,711 adjusted basis — $86,180 is ordinary income and the rest is taxed at 25% or 15%. The figure most owners want is that first one: the ordinary slice is the amount the study reclassified, less the straight-line depreciation the land improvements would have produced anyway.
Does cost segregation increase the tax rate on my gain?
On the reclassified dollars, yes, and being plain about it is more useful than pretending otherwise. Dollars moved out of the 27.5-year building into 5-, 7- and 15-year buckets come back at ordinary rates instead of under the 25% ceiling — for a seller in the 32% bracket, roughly a 7-point rate premium, about $6,000 on the $86,180 above.
Set that against what the study produced: $30,624 of cash four years earlier, free to compound or service debt. For owners holding more than a few years the time value wins comfortably; for an owner selling inside two or three years it often does not, which is why the projection is worth running first. Our piece on what happens if you sell within three years works through that short-hold case.
How do I know which bucket each dollar falls into?
From the component schedule in the study report. It assigns every reclassified dollar to an asset class and recovery period, and it is what your CPA uses to complete Form 4797 in the year of sale. Without it a preparer cannot defensibly separate the Section 1245 piece from the Section 1250 piece, and the usual fallback — treating everything as building depreciation — is wrong in both directions.
So keep the report with your permanent records, not just with the year you filed it — a sale four or eight years later is when it earns its keep. And give the schedule to your CPA before the closing date is set, because several of the levers (contract allocations, a December-versus-January closing, the installment-sale question) are only available beforehand. Our walk-through of recapture on an ordinary sale covers the mechanics in more depth, and the savings calculator on our homepage will put a first-year number on your own property in about a minute.
The basis schedule is the first thing a reviewer pulls in a sale year, and a thin allocation costs far more to defend after the fact than to build correctly. Every study we deliver is built to be audit-ready and passes a documented quality-control review.