Every dollar of depreciation an owner deducts against rental or business real estate over the years reduces taxable income while the property is held, and then comes back due at sale as depreciation recapture. It surprises a lot of sellers because it is calculated separately from the regular capital gain and taxed at its own rate, not folded quietly into the rest of the sale proceeds.
Why Recapture Exists at All
Depreciation is a paper deduction based on the assumption that a building wears out over time, generally 27.5 years for residential rental property and 39 years for commercial property under current schedules. Real estate frequently appreciates instead of losing value, so when it sells for more than the depreciated basis, the IRS treats the portion of the gain attributable to depreciation as recapture rather than ordinary appreciation, since that value was never actually lost.
The Rate That Makes This Different From Capital Gains
Unrecaptured Section 1250 gain, the technical term for real property depreciation recapture, is taxed at a maximum rate of 25 percent, which is higher than the 0, 15, or 20 percent long-term capital gains rates that apply to the remaining appreciation. An owner in a lower income bracket who would otherwise pay 15 percent on a straightforward gain can still owe 25 percent on the recapture portion specifically.
This is calculated as its own line on the tax return, worksheet-driven, and it is easy for an owner estimating their tax bill from memory to miss it entirely or assume the whole gain gets one rate.
A Simple Example of How the Split Works
- An owner buys a rental for $300,000 and claims $80,000 of depreciation over the holding period
- Adjusted basis drops to $220,000
- The property sells for $400,000
- Total gain is $180,000, split into $80,000 of recapture taxed up to 25 percent and $100,000 of remaining gain taxed at the standard long-term capital gains rate
The recapture amount is generally capped at the total depreciation actually claimed, so it cannot exceed what was deducted over the years even if the total gain is much larger.
How a 1031 Exchange Changes the Timing
Recapture is deferred along with the rest of the gain when a sale is structured as a Section 1031 exchange into qualifying replacement property. The deferred recapture amount carries forward and attaches to the replacement property, meaning it does not disappear, it simply comes due again whenever that replacement property is eventually sold in a transaction that is not itself an exchange.
An investor exchanging repeatedly across multiple properties over a career can keep pushing recapture forward each time, though the eventual liability accumulates rather than resets.
Recapture on Property Owned by an Estate or Received as a Gift
Depreciation recapture generally does not carry forward to an heir who inherits property with a stepped-up basis, since the basis reset also resets the recapture calculation. A gift, by contrast, typically carries the giver's original basis and their accumulated depreciation to the recipient, meaning recapture exposure transfers along with the property rather than being erased the way it is at death.
This distinction is one reason estate planning conversations about real estate often weigh holding an appreciated, heavily depreciated property until death against gifting it during life, since the two paths lead to very different recapture outcomes for whoever ends up owning it next.
Common Questions
Is depreciation recapture taxed the same in every state?
The federal 25 percent maximum rate is consistent, but most states tax the recaptured amount as ordinary income at their own state rate on top of the federal liability, and a handful of states have no income tax at all, so total exposure varies by where the property is located and where the owner resides.
Can I avoid recapture by never claiming depreciation on a rental?
No. The IRS calculates recapture based on depreciation allowed or allowable, meaning it applies the recapture rate to the depreciation an owner was entitled to take whether or not they actually claimed it, so skipping the deduction only costs the owner the benefit without avoiding the eventual recapture exposure.
Does recapture apply to land as well as the building?
No, land is not a depreciable asset, so only the depreciated portion of the building and any depreciable improvements is subject to recapture. Land value is treated as ordinary capital gain.
How is recapture calculated when a property was improved multiple times over the years?
Each improvement generally has its own depreciation schedule based on when it was placed in service, and recapture is calculated on the cumulative depreciation across the original structure and all improvements combined, which is why a complete depreciation history matters at sale.
