If a property was initially purchased for $ 200,000, and the owner claims depreciation of $ 30,000, the adjusted cost basis for the property is considered to be $170,000.
If the property is subsequently sold for $225,000, the owner has recognized an overall gain of $55,000 over the adjusted cost basis.
Since the property has sold for more than the basis that had been adjusted for depreciation, the unrecaptured section 1250 gains are established on the difference between the adjusted cost basis and the original purchase price.
Making the first $30,000 of the profit liable to the unrecaptured section 1250 gain, while the remaining $25,000 is taxed at the regular long-term capital gains.
So the higher capital gains tax rate of up to 25% would be applicable on $30,000. The remaining $25,000 would be taxed at the long-term capital gains rate of 15%.