Depreciation Recapture When Selling Rental Property: What You'll Owe
Depreciation saves you thousands every year you own a rental property. But when you sell, the IRS wants some of that back. This is depreciation recapture — a tax of up to 25% on all the depreciation you've taken. Here's exactly how it works and how to plan for it.
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What Is Depreciation Recapture?
Every year you own a rental property, you deduct depreciation to reduce your taxable income. This lowers your cost basis in the property. When you sell, the difference between your sale price and your adjusted basis is your gain — and the portion of that gain attributable to depreciation is recaptured and taxed at a special rate.
Section 1250 Recapture
For residential rental property using straight-line depreciation, recapture is taxed under unrecaptured Section 1250 gain at a maximum rate of 25%. This is separate from (and in addition to) any capital gains tax on the property's appreciation. You could owe both recapture tax AND capital gains tax on the same sale.
Think of it this way: depreciation gave you a tax benefit each year at your marginal rate (possibly 22%, 24%, 32%). At sale, the IRS charges you back at up to 25%. If you were in a bracket below 25%, you actually pay recapture at your regular rate — not 25%.
How to Calculate Your Recapture Tax
The formula is straightforward:
Adjusted Basis = Purchase Price + Improvements - Total Depreciation Taken
Total Gain = Sale Price - Selling Costs - Adjusted Basis
Recapture Amount = Total Depreciation Taken (up to total gain)
Remaining Gain = Total Gain - Recapture Amount (taxed as capital gain)
The recapture amount cannot exceed your total gain. If you sell at a loss, there's no recapture. If your gain is less than total depreciation taken, recapture is limited to the gain amount.
Complete Sale Example
Selling after 10 years of ownership
Note: Over 10 years, depreciation saved approximately $145,455 x 24% = $34,909 in taxes. At sale, recapture costs $36,364. The net cost is about $1,455 — but you had the use of that $34,909 for up to 10 years. The time value of money makes depreciation a clear winner.
"Allowed or Allowable" — The Trap
Critical Warning
The IRS calculates recapture on depreciation "allowed or allowable" — meaning even if you forgot to claim depreciation, the IRS will treat you as if you did. Not taking depreciation does NOT help you avoid recapture. You'll owe the same recapture tax whether you claimed the deduction or not. Always take your depreciation.
This is one of the most commonly misunderstood rules in rental property taxation. Some landlords skip depreciation thinking they'll pay less when they sell. They won't. They'll pay the same recapture AND they'll have missed years of deductions. It's lose-lose.
Strategies to Defer or Minimize Recapture
1031 Exchange
A like-kind exchange under IRC Section 1031 defers both capital gains AND depreciation recapture taxes. You sell your property and reinvest in a replacement property within 180 days. Recapture is deferred — not eliminated — until you eventually sell without exchanging. Many investors do serial 1031 exchanges and never pay recapture.
Die with the property (step-up in basis)
When you pass away, your heirs receive the property with a stepped-up basis equal to fair market value at the date of death. All accumulated depreciation is effectively erased. No recapture, no capital gains. This is a legitimate estate planning strategy for long-term holds.
Installment sale
Spreading the sale over multiple years via an installment sale (seller financing) lets you spread the recapture tax across years. This can keep you in a lower bracket each year rather than recognizing all gain in one year.
Offset with capital losses
Capital gains from the sale (not recapture) can be offset with capital losses from other investments. Recapture itself cannot be offset with capital losses — it's taxed separately.
Qualified Opportunity Zone investment
Investing capital gains from a property sale into a Qualified Opportunity Zone fund can defer and potentially reduce capital gains tax. This doesn't directly address recapture, but it helps with the capital gain portion.
Cost Segregation and Recapture
If you did a cost segregation study and took large bonus depreciation deductions in Year 1, you'll have a larger recapture amount at sale. This is the trade-off of accelerated depreciation.
However, the math still heavily favors taking the accelerated depreciation:
Cost Seg Recapture Math
Plus: You had $48,000 in tax savings available for reinvestment for years. At even 6% annual return, that compounds significantly. And if you do a 1031 exchange, you defer the entire $37,500 recapture.
Track Your Depreciation and Plan for Recapture
SheltrIQ tracks all depreciation taken per property and models your recapture exposure at any time. Know your exit tax before you list.