What Is Depreciation Recapture?
When you own a rental property, you deduct depreciation each year — a non-cash expense that lowers your taxable income. When you sell, the IRS says: you got a tax break for "wearing out" the building, but you're selling it for more than your depreciated basis. So we're taxing that depreciation back at 25% (unrecaptured Section 1250 gain). It's separate from capital gains tax — you can owe both. You can defer recapture with a 1031 exchange or eliminate it entirely with a step-up in basis at death.
Depreciation recapture is the tax you owe when you sell a rental property on the depreciation you've already claimed — the IRS "recaptures" that benefit at a 25% rate (Section 1250) because you took deductions without the building actually losing that much value.
At a Glance
- What it is: Tax on previously claimed depreciation when you sell — 25% rate (Section 1250)
- Why it matters: Can add $10K–$50K+ to your tax bill on a typical rental sale
- How to calculate: Total depreciation claimed × 25% = recapture tax (capped at gain)
- Deferral: 1031 exchange defers it; step-up in basis at death eliminates it
Recapture Tax = Total Depreciation Claimed × 25%
How It Works
The mechanic. Each year you own a rental, you claim straight-line depreciation (or accelerated via cost segregation) — reducing your taxable income. The IRS assumes the building is wearing out over 27.5 years (residential) or 39 years (commercial). When you sell, the difference between your original cost basis and your depreciated basis is "recaptured" — taxed at 25% as ordinary income (up to the gain). It's the IRS saying: you got a deduction for depreciation you didn't actually experience in cash; now you're cashing out, so we're taking some back.
Separate from capital gains. You can owe both. Capital gains tax applies to the profit above your original basis; recapture applies to the depreciation you claimed. They're calculated separately and both hit your income tax return. On a $400K sale with $200K original basis and $85K depreciation claimed, you might owe: (1) recapture on $85K at 25% = $21,250, (2) capital gains on the remaining gain at 0/15/20% depending on income.
Deferral via 1031. A 1031 exchange defers both capital gains and depreciation recapture. You roll the entire gain (and the depreciated basis) into the replacement property. No tax until you eventually sell for cash without exchanging. That's why serial exchangers never pay recapture — they keep trading up.
Elimination via step-up. If you hold until death, your heir gets a step-up in basis to fair market value. The depreciation history disappears. No recapture. This is the "never sell" exit for buy-and-hold investors.
Real-World Example
Investor in Memphis, Tennessee. You bought a duplex in 2015 for $180,000. Over 10 years you claimed $85,000 in depreciation (straight-line on the building portion). You sell in 2025 for $320,000. Your adjusted basis is $180,000 − $85,000 = $95,000. Your total gain is $320,000 − $95,000 = $225,000.
Of that, $85,000 is "unrecaptured Section 1250" — taxed at 25% = $21,250. The remaining $140,000 is long-term capital gain, taxed at 0%, 15%, or 20% depending on your income. If you're in the 15% bracket, that's another $21,000. Total federal tax on the sale: roughly $42,250. The recapture piece alone is a meaningful chunk — and it's often the surprise that catches new investors off guard at tax time.
Pros & Cons
- Predictable — you know the rate (25%) and the amount (depreciation claimed)
- Can be deferred indefinitely via 1031 exchange
- Can be eliminated via step-up in basis at death
- Incentivizes long-term holding and tax-efficient exits
- Hits you at sale — a non-cash "expense" during ownership becomes a real tax bill at exit
- 25% rate is higher than long-term capital gains for many investors
- Cost segregation accelerates depreciation, which accelerates recapture when you sell
Watch Out
- Modeling risk: Don't forget recapture in your exit projections — it can reduce net proceeds by 5–15% on a typical rental
- Cost seg trap: Cost segregation front-loads depreciation (great for cash flow now) but increases recapture later — plan your hold period
- Exchange timing: If you're doing a 1031 exchange, ensure you don't take exchange boot — boot is taxable and can include recapture
- State add-on: Some states tax recapture as ordinary income at state rates — California, New York, etc. can add another 5–10%
Ask an Investor
The Takeaway
Depreciation recapture is the tax bill that catches investors who enjoyed years of depreciation deductions and then sell. At 25% on every dollar you've claimed, it's material — plan for it in your exit model. Defer it with a 1031 exchange, eliminate it with a step-up in basis at death, or budget for it when you sell for cash. Either way, don't let it surprise you at tax time.