Guides
Depreciation Recapture Explained
Every year you own a rental or commercial property, you likely claim depreciation deductions that reduce your taxable rental income. When you sell, the Internal Revenue Service recaptures the benefit of that depreciation by taxing a portion of your gain, known as unrecaptured Section 1250 gain, at a maximum federal rate of 25 percent, separately from your regular capital gains rate. This recapture applies whether you claimed the depreciation intentionally or were simply entitled to claim it and did not, which is why owners who skipped depreciation still face recapture exposure. A 1031 exchange defers this recapture along with your capital gain, carrying both forward into the replacement property.
What You Get
Key Outcomes
An accurate calculation of your accumulated depreciation and resulting recapture exposure
A clear separation of your total gain into ordinary recapture and standard capital gains components
An understanding of how recapture is treated if you exchange versus if you sell outright
Deliverables
What We Deliver
- A depreciation schedule review covering all years of ownership, including any accelerated methods used
- A gain bifurcation worksheet separating unrecaptured Section 1250 gain from remaining capital gain
- A written explanation of how a 1031 exchange affects your recapture position
Process
Execution Timeline
Day 0: Collect depreciation schedules and any cost segregation reports from your accountant
Day 4: Calculate accumulated depreciation and resulting recapture exposure
Day 9: Review deferral options if the recapture amount is significant relative to your total gain
Common Questions
Frequently Asked
What is depreciation recapture and how is it different from capital gains tax?
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Depreciation recapture is a separate tax category applied to the portion of your gain that corresponds to depreciation deductions you claimed, or were entitled to claim, during ownership. For real property, this is called unrecaptured Section 1250 gain and is capped at a maximum federal rate of 25 percent, which is generally higher than the top long-term capital gains rate of 20 percent that applies to your remaining gain. Both amounts are calculated on the same sale but taxed under different rules.
Do I owe recapture even if I never claimed depreciation on my property?
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In most cases, yes. The recapture calculation is based on the depreciation you were allowed to claim under the tax code, not only what you actually claimed on your returns. If you failed to claim depreciation you were entitled to, you generally cannot avoid recapture simply by skipping the deduction, though you may be able to file a change in accounting method to claim missed depreciation retroactively, which is a separate issue worth discussing with your accountant before a sale.
How does a cost segregation study affect my future recapture?
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A cost segregation study reclassifies parts of a building into shorter depreciation lives, which increases your deductions in earlier years but also increases your accumulated depreciation, and therefore your recapture exposure, at the time of sale. The accelerated deductions can be valuable during ownership, particularly for high-income owners, but they shift more of your eventual gain into the higher-taxed recapture category unless you use a 1031 exchange to defer that recapture.
Does a 1031 exchange defer depreciation recapture or only the capital gain?
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A properly structured 1031 exchange defers both. The unrecaptured Section 1250 gain and the standard capital gain both carry forward into the replacement property's basis rather than being recognized in the year of the exchange. If you later sell the replacement property outside of another exchange, both the original deferred recapture and any additional gain from the replacement property become taxable at that time.
Is recapture calculated differently for commercial buildings than for residential rentals?
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The recapture mechanics are the same category of unrecaptured Section 1250 gain for both, but the depreciation periods differ, with residential rental property depreciated over 27.5 years and nonresidential commercial property depreciated over 39 years under standard straight-line methods. Faster depreciation methods used in earlier years or through cost segregation can apply to either type, and both are subject to the same 25 percent maximum federal recapture rate on sale.
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