Depreciation recapture can drastically affect your tax bill when you sell an income property. Understanding how the IRS “recaptures” prior depreciation deductions helps investors plan for accurate returns.
This article is ideal for rental-property owners, part-time investors, real-estate professionals and tax advisors seeking a clear glossary-style overview of depreciation recapture in real estate.
Depreciation recapture is a tax on the portion of a property sale gain equal to the total depreciation deductions previously claimed. The IRS treats that portion as ordinary income, capped at 25%.
The IRS allows depreciation deductions to offset taxable rental income over the ownership period. On sale, depreciation recapture “pays back” those tax benefits by taxing the gain up to the amount of depreciation taken.
Depreciation recapture applies to the depreciation portion of your gain and is taxed at up to 25%. Any remaining gain is taxed at long-term capital gains rates (0%, 15%, or 20%).
Even small-scale investors must consider recapture when selling their first rental property.
Annual depreciation reduces taxable income but creates recapture exposure on sale.
Deferring gain via like-kind exchanges involves specific recapture rules.
Accurate reporting of recapture on Form 4797 and Schedule D is essential.
Understanding recapture helps guide clients and draft sale agreements with tax clauses.
Add up all depreciation deductions claimed, excluding land cost.
Subtract the adjusted basis (original cost minus accumulated depreciation) from the sale price to determine total gain.
The lesser of total depreciation claimed or the total gain is recaptured.
You buy for $300,000, claim $50,000 depreciation. Adjusted basis $250,000. Sell for $350,000: $100,000 gain, $50,000 recaptured at up to 25%, remaining $50,000 taxed as a capital gain.
Recaptured depreciation is taxed at ordinary income rates capped at 25% federally.
Any gain beyond depreciation is taxed at preferential long-term capital gains rates depending on your bracket.
Some states tax depreciation recapture at ordinary rates or mirror federal caps; check local rules.
A 1031 exchange swaps one investment property for another to defer gain and recapture recognition.
Strict timelines: identify replacement within 45 days, close in 180 days; reinvest net equity fully.
Receiving non-like-kind property or cash (“boot”) triggers partial recapture and capital gains tax on the boot value.
Structured installment sales and Tenants-in-Common (TIC) programs can spread or defer recapture liabilities.
Report recapture on Part III of Form 4797, line 26, before netting gains to Schedule D.
Transfer any remaining gain after recapture from Form 4797 to Schedule D for long-term capital gains treatment.
Underreporting depreciation taken, misallocating between forms, and missing basis adjustments are frequent errors.
Keep annual depreciation logs showing how each year’s deduction was calculated.
Retain purchase/sale settlement statements and invoices for additions that adjust your basis.
Maintain a file with purchase docs, depreciation logs, improvement receipts, Form 4797 copies, and prior tax returns.
Sell in a year with lower taxable income to minimize tax rate impact.
Allocate property components to shorter-life assets to front-load depreciation—but watch recapture exposure.
Use 1031 exchanges alongside installment sales or charitable remainder trusts for layered deferral.
No. Depreciation recapture rules apply to business or rental properties, not your primary home—unless you claimed depreciation for part used as rental or office.
If no depreciation was claimed, there is no recapture. Your entire gain may still qualify for capital gains treatment.
Yes. The IRS can audit depreciation deductions and recapture reporting within the statute of limitations, generally three years after filing.
Partially rented vacation homes follow similar rules; allocate personal use vs. rental days when calculating allowable depreciation and basis.
Depreciation recapture taxes the depreciation portion of your property sale gain at up to 25%. Plan ahead to defer or minimize this liability.
Use an online depreciation recapture calculator or tax software to model scenarios and estimate liabilities.
Consult a CPA or tax advisor if you have complex exchanges, cost segregation studies or unusual property use to ensure accurate reporting.
