Why It Matters
You took depreciation deductions every year you owned the property, which lowered your taxable income. When you sell, the IRS wants a portion of that back. The recaptured amount is the total depreciation you claimed, taxed at up to 25% for residential real estate (§1250) — a rate that sits above the standard long-term capital gains rates of 0%, 15%, or 20%. If you used cost segregation or bonus depreciation to reclassify components as personal property, those portions recapture at your ordinary income rate, which can be considerably higher. The good news: a 1031 exchange defers all of it, and heirs who inherit the property avoid recapture entirely through the step-up in basis.
At a Glance
- What it is: Tax owed on accumulated depreciation when you sell a depreciated property
- Rate: Up to 25% for §1250 real property; ordinary income rate for §1245 personal property
- Calculated from: Total depreciation claimed × applicable recapture rate
- Deferred by: 1031 exchange (rolls recapture into the replacement property)
- Eliminated by: Death — heirs receive a step-up in basis that wipes out accumulated depreciation
Recapture Tax = Accumulated Depreciation × Recapture Rate
How It Works
The mechanics of the tax. Every year you own a rental property, you deduct 27.5-year depreciation — roughly the building's value divided by 27.5 for residential property. That deduction reduces your adjusted basis in the property. When you sell, the IRS computes your total gain as sale price minus adjusted basis. The portion of that gain attributable to depreciation you claimed is the "recaptured" amount, and it's taxed under Section 1250 at a maximum rate of 25%. The remaining appreciation above the original purchase price is taxed as long-term capital gains.
The §1245 wrinkle. If you did cost segregation or took bonus depreciation, you likely reclassified personal property components — appliances, carpeting, land improvements — and accelerated those deductions. That's smart tax planning while you hold the property. But those components fall under Section 1245, and their recapture is taxed at your ordinary income rate, not the capped 25%. For investors in the 37% bracket, that's a meaningful distinction. The accelerated depreciation benefit you enjoyed is partially offset by a heavier tax hit at exit.
Your exit options. The most common deferral tool is the 1031 exchange, which lets you swap into a new property and push both the recapture and capital gains tax forward indefinitely. An installment sale spreads the tax bill across the years you receive payments, smoothing the cash impact. Holding the property until death is the most aggressive strategy — heirs inherit at fair market value and the step-up in basis eliminates all accumulated depreciation, meaning recapture never triggers.
Real-World Example
Lisa owns a duplex she bought for $387,000 in 2015. Land was valued at $57,000, so her depreciable basis was $330,000. At $330,000 / 27.5 years, she's been deducting $12,000 per year. After ten years of ownership, she's accumulated $120,000 in depreciation.
She sells for $503,000 in 2025. Her adjusted basis is $387,000 − $120,000 = $267,000. Total gain: $503,000 − $267,000 = $236,000. Of that, $120,000 is recaptured depreciation, taxed at 25% — a $30,000 federal tax hit. The remaining $116,000 of appreciation is taxed at her long-term capital gains rate of 15%, adding another $17,400. Her total federal tax on the sale: $47,400. Lisa's CPA runs the same math on a 1031 exchange, which would defer that entire $47,400. She decides to exchange into a small apartment building and keep her equity compounding.
Pros & Cons
- Depreciation deductions reduce your tax bill every year you hold the property, providing cash flow advantages that far exceed the recapture cost in many scenarios
- The 25% cap on §1250 recapture is lower than most investors' ordinary income tax rate, making the eventual tax cost predictable
- Multiple deferral and elimination strategies exist — 1031 exchange, installment sale, charitable remainder trust, and step-up at death
- Understanding recapture lets you calculate your true after-tax exit proceeds and make accurate hold-vs-sell comparisons
- §1245 recapture (from cost segregation and bonus depreciation) is taxed at ordinary income rates — up to 37% — not the capped 25% rate
- Recapture tax is owed even if the property sold for less than you paid, as long as you claimed depreciation during ownership
- A failed or disqualified 1031 exchange triggers immediate recapture with no second chance at deferral
- Investors who don't track accumulated depreciation carefully can be blindsided by the tax bill at closing
Watch Out
- Cost segregation amplifies §1245 exposure: Reclassifying 15–30% of a property's value as 5- or 7-year personal property accelerates your deductions, but every dollar of §1245 depreciation recaptures at ordinary income rates. Model the exit tax before you commit to a cost seg study.
- Depreciation recapture even on a loss sale: If you sell for less than your original purchase price but still claimed depreciation, recapture applies to the depreciation you took. The loss offsets capital gains, not the recapture amount.
- 1031 exchange timeline is strict: You have 45 days to identify replacement property and 180 days to close. Missing either deadline converts the deferred exchange into an immediate taxable sale — and recapture triggers in full.
- State taxes stack on top: Federal recapture is capped at 25%, but states tax the gain at their own rates. California, for example, taxes all capital gains as ordinary income — which means recapture plus the remaining appreciation are both hit at up to 13.3%.
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The Takeaway
Depreciation recapture is not a penalty — it's the IRS collecting on the tax deferral you already received. The real question isn't whether to avoid it but when to pay it. A 1031 exchange delays the bill indefinitely; a step-up at death eliminates it entirely. If you're planning a sale, run the recapture math before you set your price — it can easily represent $30,000–$60,000 on a mid-sized property, and that number belongs in your net proceeds calculation from day one.