When you sell a rental property, the IRS recaptures all depreciation you previously claimed by taxing it at up to 25% (Section 1250 unrecaptured gain rate) — higher than the 15–20% long-term capital gains rate.
Example: You claimed $50,000 in total depreciation over 5 years. At sale, that $50,000 is taxed at 25% = $12,500 in recapture tax, regardless of your income bracket.
Ways to avoid or defer recapture:
- 1031 Exchange — defer both capital gains and recapture indefinitely
- Hold until death — heirs receive a step-up in basis, eliminating recapture
- Opportunity Zone Fund — partial deferral option
Related Terms
MACRS Depreciation
IRS tax deduction allowing investors to deduct the cost of a building over 27.5 years (residential) or 39 years (commercial).
Cost Segregation
IRS-approved engineering study that reclassifies building components to shorter depreciation lives, accelerating tax deductions.
1031 Exchange
IRS provision allowing investors to defer capital gains tax by reinvesting sale proceeds into a like-kind property.