What if I sell at a loss?

If you sell the property for less than your Adjusted Cost Basis, you generally don't have recapture. You actually have a Section 1231 loss, which is incredibly powerful because it can offset your ordinary income (wages/business income) without the $3,000 cap.

Is the rate always 25%?

Technically, Section 1250 recapture (buildings) is taxed at your ordinary income tax rate, CAPPED at 25%. So if you are in the 37% bracket, you pay 25%. If you are in the 12% bracket, you pay 12%. However, Section 1245 recapture (furniture/bonus depr) is UNCAPPED—it's just ordinary income.

Does my primary home have recapture?

Only if you claimed depreciation on it (e.g., for a home office deduction or if you rented it out for a period). The standard $250k/$500k exclusion for primary homes does NOT wipe out depreciation recapture—that part is still taxable.

Can I use Opportunity Zones to avoid this?

Yes. Investing capital gains (including recapture) into a Qualified Opportunity Fund defer the tax until 2026 and can reduce the bill by 10-15%. Plus, appreciation in the QOZ fund becomes tax-free after 10 years.

How do I avoid depreciation recapture tax?

The most effective way to avoid depreciation recapture is a 1031 exchange — selling your investment property and reinvesting the proceeds into a like-kind replacement property within 180 days. This defers both capital gains and depreciation recapture indefinitely. Other strategies include holding the property until death (heirs receive a stepped-up basis, eliminating recapture), converting to a primary residence for 2+ years before selling, or investing gains into a Qualified Opportunity Zone fund.

How much is depreciation recapture tax in 2026?

Depreciation recapture on real property (Section 1250) is taxed at your ordinary income tax rate, capped at 25%. Recapture on personal property like furniture and appliances (Section 1245) is taxed at your full ordinary income rate with no cap. Additionally, the 3.8% Net Investment Income Tax (NIIT) may apply if your MAGI exceeds $250,000 (MFJ), bringing the effective maximum rate to 28.8% for Section 1250 recapture.

Real Estate Strategy #5

The Tax Bill That Lurks In The Shadows.

You enjoyed years of tax-free cash flow thanks to depreciation. Now you want to sell. The IRS is waiting to take their 25% cut. It's called "Recapture," and it destroys wealth.

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A guide by Taxstra Tax & Accounting — CPA-led tax strategy for business owners

Your Guide

01What Is Recapture?02Not All Recapture Is Equal 03How To Never Pay It 04Worked Example: $500K Rental Property 05Related Strategies & Resources 06FAQs

What Is Recapture?

The payback the IRS expects when you sell

Key Insight

Depreciation recapture is the IRS provision that taxes you when you sell a property for more than its depreciated (adjusted) basis. Every dollar of depreciation you claimed — including bonus depreciation and cost segregation deductions — gets "recaptured" and taxed at up to 25% (Section 1250) or your full ordinary rate (Section 1245 for personal property). The primary strategy to avoid recapture is a 1031 like-kind exchange, which defers both capital gains and recapture indefinitely.

Think of depreciation as an interest-free loan from the government. They let you take a deduction now to lower your taxes, but if you sell the property for a profit later, they want that money back.

This "payback" is called Depreciation Recapture.

Watch Out

Most investors assume they will pay Capital Gains Tax (15% or 20%) when they sell.

Wrong. The portion of the gain due to depreciation is taxed at a specific Recapture Rate of up to 25%.

Sample calculation — the math of selling:

The Math of Selling	Amount
Original Purchase Price	$1,000,000
Depreciation Taken (you deducted this over 10 years)	($400,000)
Adjusted Cost Basis	$600,000

If you sell for $1.5M:

Tax at Sale	Amount
Recapture Tax ($400k @ 25%)	$100,000
Cap Gains Tax ($500k @ 20%)	$100,000
Total Fed Tax Bill	$200,000

Not All Recapture Is Equal

Deep dive: Section 1250 vs. Section 1245

If you did a Cost Segregation Study or took Bonus Depreciation, you stirred up a different beast.

	Section 1250 (Real Property) — The Building Structure	Section 1245 (Personal Property) — Furniture, Equipment, & Bonus Depr
Applies to	The building itself (walls, roof, foundation)	Appliances, carpeting, and anything you wrote off using Bonus Depreciation
Recapture rate	Taxed at a maximum of 25%	Taxed at your Ordinary Income Rate (up to 37%)
Impact	Moderate	Severe

How To Never Pay It

The escape hatch: two primary ways savvy investors avoid depreciation recapture

You don't have to write that check to the IRS. Here are the two primary ways savvy investors avoid depreciation recapture.

1031 Exchange. The "Swap 'Til You Drop" strategy. Instead of selling and taking the cash (which triggers the tax), you roll all the equity into a new, "like-kind" property.

Recapture tax is deferred 100%.
Capital gains tax is deferred 100%.
Buying power remains intact.

Step-Up In Basis. The ultimate tax shelter. If you hold the property until death, your heirs receive it with a "stepped-up" basis equal to the fair market value at the time of death.

Depreciation recapture is wiped out forever.
Heirs can sell immediately tax-free.
Heirs can start depreciating it all over again.

Worked Example: $500K Rental Property

Depreciation recapture calculation, step by step

A property purchased for $500,000 (building $400,000, land $100,000) is owned for 5 years with depreciation and cost segregation strategies applied.

Basis Calculation	Amount
Original Purchase Price	$500,000
Total Depreciation Claimed (5 years) — includes $70K straight-line + $80K from cost segregation bonus	($150,000)
Adjusted Basis (Cost Basis - Depreciation)	$350,000

Sale scenario: sell for $600,000.

Sale Scenario	Amount
Sale Price	$600,000
Adjusted Basis	($350,000)
Total Gain	$250,000
Section 1250 Recapture ($70K @ 25%)	$17,500
Section 1245 Recapture ($80K @ 35% ordinary rate)	$28,000
Capital Gain on Appreciation ($100K @ 20%)	$20,000
Net Investment Income Tax (3.8% on $250K)	$9,500
Total Federal Tax Due at Sale (Without 1031)	~$75,000

Taxstra CPA Tip

$0 due at sale. Tax is deferred indefinitely. Depreciation recapture follows into the replacement property.

Real Estate Strategy Hub — all real estate tax strategies in one place.
Cost Segregation — the accelerated-depreciation strategy that makes exit planning essential.
1031 Exchange — the primary tool for deferring recapture and capital gains.
Bonus Depreciation — how front-loaded deductions create Section 1245 recapture exposure.
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FAQs

Recapture FAQ

Yes. Since you are taking more depreciation upfront, you will have more to recapture later if you sell. This is why having an exit strategy (like a 1031 Exchange) is critical before you even buy. Accelerated deductions = Accelerated recapture risk.

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