I hope you are correct, as I'm planning to sell a property in a few years and will have quite a gain and recapture, it would be nice if it costs less than I currently think.
Maybe they changed the rules since 2015 , but even this CPA website says the recapture is at 25% and the normal capital gain is at normal rates..
"However, not all gains benefit from the long term capital gain tax rates. Depreciation recapture is the portion of the gain attributable to the depreciation deductions previously allowed during the period the taxpayer owned the property. The deprecation recapture rate on this portion of the gain is 25%. The reasoning behind the depreciation recapture rules is since the taxpayer received the benefit of a depreciation deduction that offset ordinary income tax rates (a potential Federal tax savings of up to 39.6%), the government is not going to grant the most favorable capital gains rates on the portion of the gain relating to these prior depreciation deductions. The following examples illustrate the concept of depreciation recapture."
Tax Matters: Tax Implications of “Depreciation Recapture” When Selling Real Estate
I think many websites provide examples with a 25% rate because that's a common result for people with other substantial sources of taxable income and/or many years of depreciation to recapture. Perhaps these websites also have a better chance of attracting potential clients by portraying the worst-case scenario. In any case, other websites are more specific. Here's a quote from Investopedia:
Unrecaptured Section 1250 income is taxed at a 25% maximum capital-gains rate, or less in some cases.
And here's another that's even more specific:
Unrecaptured Section 1250 Gain is taxed at a maximum capital gain rate of 25% under the long-term capital gain tax rules (15% for taxpayers in the 15% and 10% tax brackets on ordinary income).
IRS Pub 544 clearly lists 25% as the "maximum" tax rate on unrecaptured Section 1250 gain. It does not discuss specific rates beyond that except by reference to the Schedule D instructions and tax worksheet. That worksheet will make even patient people like me want to jump off the nearest building. But if you work through a simple example (preferably with TurboTax or other software), you will see that, at lower income levels, the depreciation recapture (aka... unrecaptured Section 1250 gain) can in fact be taxed at 15%.
It's not really ordinary income; it's a special capital gain rate. But I think perhaps the idea is that the depreciation is "recaptured" at your ordinary income rate, up to a max of 25%. So it's still a benefit for high-income taxpayers who deducted the depreciation in the 28% bracket and above. Also, I don't think it would make sense to have a CG rate higher than one's tax bracket based on ordinary income.
The good news for early retirees is: if the recapture is not huge, and you can squeeze it in while other taxable income is very low (before SS, RMDs, pension, etc), you might be able to avoid the 25% rate. If TurboTax is to be believed, that's exactly what we're facing in 2017.