Depreciation Recapture On Rental Property: How It Works And How To Plan For It
David Roberts
CEO and Founder of ReVerb
10.17.2026
Depreciation is one of the biggest tax benefits of owning rental property. Each year you deduct part of the building’s cost, even if the property is rising in value. The trade-off comes when you sell: the IRS taxes back part of the benefit through depreciation recapture.
Recapture surprises many investors, especially those who used cost segregation and bonus depreciation to take large deductions early. This guide explains how it works and the main ways to plan for it.
This guide is general information for investors, not tax or legal advice. Tax rules change and depend on your facts, so confirm any strategy with a qualified CPA or tax attorney before acting on it.
What Depreciation Recapture Is
When you sell a rental property for more than its adjusted basis, part of the gain reflects depreciation you deducted in earlier years. That portion is taxed under special rules rather than at the regular long-term capital gains rates.
One important detail: the IRS uses depreciation “allowed or allowable”. Even if you never claimed depreciation, your basis is reduced as if you had, and recapture can still apply. Skipping depreciation does not avoid recapture; it only loses the deduction.
How Recapture Is Taxed
Type Of Property
Examples
How Recapture Is Taxed
Building (Section 1250 property)
Structure depreciated over 27.5 or 39 years
Unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25%
Personal property (Section 1245 property)
Appliances, furniture, carpet and similar items, often identified in a cost segregation study
Ordinary income rates, up to the amount of depreciation taken
Land improvements
Paving, landscaping, fencing (15-year property)
Section 1250 property; where bonus or accelerated depreciation was taken, the excess over straight-line can be recaptured at ordinary rates
Any remaining gain above the depreciation taken is generally taxed at long-term capital gains rates if the property was held for more than a year. The 3.8% net investment income tax may also apply, depending on your income and whether the rental is passive.
A Simple Example
An investor buys a rental for $500,000, with $100,000 allocated to land, and takes $80,000 of straight-line depreciation on the building over several years. The adjusted basis is now $420,000. The investor sells for $650,000, a $230,000 gain. Of that, $80,000 is unrecaptured Section 1250 gain taxed at up to 25%, and $150,000 is long-term capital gain.
What Changes With Cost Segregation
A cost segregation study moves part of the building into five, seven and fifteen-year property, and bonus depreciation can deduct much of it in the first year. That creates a larger deduction up front, often at your ordinary income rate, but the personal property portion is Section 1245 property, which can be recaptured at ordinary rates when you sell.
Recapture on those assets is limited to the lower of the depreciation taken and the gain allocated to them. By the time of a sale, carpet, appliances and finishes may be worth very little, so the sale price allocated to them, and therefore the recapture, can be modest. A good study and a careful purchase and sale allocation matter. Our guide to how cost segregation works covers the basics.
Ways Investors Plan For Recapture
Hold The Property Long Term
Recapture is a cost paid at sale. The longer you hold, the longer you benefit from the deductions taken earlier, and the time value of those savings can outweigh the later tax.
Use A 1031 Exchange
A like-kind exchange into other real property can defer both capital gain and depreciation recapture, with your basis carrying over to the replacement property. Since 2018, only real property qualifies, so personal property identified in a cost segregation study may need separate planning in an exchange. Discuss this with your CPA and qualified intermediary before you sell.
Hold Until Death
Under current law, heirs generally receive a stepped-up basis to fair market value at death, which can eliminate both the gain and the recapture that would have applied to a sale during life.
Plan The Sale Year
Selling in a year with lower income, or with losses from other activities, can reduce the rate at which recapture is taxed. Released suspended passive losses on a full disposition can also offset income in the year of sale.
Know What Does Not Work
An installment sale spreads capital gain over time, but depreciation recapture is generally taxed in the year of sale regardless of when payments arrive. Converting a rental to a personal residence does not erase depreciation already taken either.
Should Recapture Stop You From Using Cost Segregation?
Usually not. For many investors the value of taking deductions early, combined with the chance to defer or reduce recapture through exchanges, long holding periods or estate planning, outweighs the later tax. But it should be modeled, especially if you expect to sell within a few years. Our guide on whether cost segregation is worth it for residential rental property covers the trade-off in more detail.
What is the depreciation recapture rate on rental property?
Depreciation on the building is generally taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25%. Depreciation on personal property, such as appliances and furniture, is generally taxed at ordinary income rates.
Can I avoid depreciation recapture?
You can defer it with a 1031 exchange and potentially eliminate it by holding the property until death, when heirs generally receive a stepped-up basis. Simply not claiming depreciation does not avoid it.
Does recapture apply if I sell at a loss?
No. Recapture applies only to gain. If you sell for less than your adjusted basis, there is no recapture.
Is recapture different for short-term rentals?
The recapture rules are the same. What differs is how the losses were used while you owned the property. See our guide to the short-term rental tax loophole.
