Depreciation Recapture — What Happens When You Sell

TL;DR: Every dollar of depreciation you claimed (or could have claimed) on a rental gets recaptured at sale — taxed at up to 25% regardless of whether the rest of your gain gets the lower capital gains rate.

_Last reviewed: July 2026 · 4 min read_

If you're planning to sell a rental you've been depreciating for years and are wondering about the tax bill, the honest answer is: every dollar of depreciation you claimed (or could have claimed) gets "recaptured" at sale and taxed at up to 25% federal — separately from the capital gains rate that applies to the rest of your appreciation. It surprises many landlords and is usually the biggest single tax line at a rental sale.

Okoniq Property Hub stores your annual depreciation schedule so the recapture number at sale is a lookup, not a decade-of-tax-returns audit.

What is depreciation recapture?

For residential rentals, IRS Section 1250 requires that any depreciation deducted during ownership be "recaptured" when you sell — meaning it's added back to your gain and taxed at a maximum 25% federal rate ("unrecaptured Section 1250 gain") rather than the normal long-term capital gains rate of 15% or 20%.

The 25% applies specifically to the depreciation portion. Any gain ABOVE your original cost basis is still taxed at normal long-term capital gains rates.

Full mechanics are in IRS Publication 544 (Sales of Business Property).

A concrete example

Say you bought a rental for $300,000 in 2010, depreciated $10,000/year for 15 years = $150,000 total depreciation. You sell in 2026 for $500,000 with $30,000 selling costs.

Your adjusted basis is $300K − $150K = $150,000.

Gain calculation:

• Sale price: $500,000
• Selling costs: ($30,000)
• Adjusted basis: ($150,000)
• Total gain: $320,000

Of that $320K gain:

• $150,000 is recaptured depreciation → taxed at 25% max → up to $37,500 federal
• $170,000 is long-term capital gain on appreciation → at 15% typical → $25,500 federal

Total federal tax on the sale: roughly $63,000. State tax on top. And a possible 3.8% Net Investment Income Tax at higher incomes.

What about depreciation I didn't actually claim?

This is the trap. Section 1250 recaptures allowed OR allowable depreciation. If you owned the rental for 10 years and forgot to depreciate it — the IRS still treats you as if you had, and you owe recapture at sale on the amount you SHOULD have claimed.

You can't escape recapture by not claiming depreciation. Always claim it, even if you have a paper loss you can't use immediately (see passive loss allowance).

Can I avoid recapture?

Legitimate paths:

1. 1031 exchange — defers all gain including recapture to the replacement property. See 1031 exchanges — a landlord's introduction.
2. Hold until death — heirs get stepped-up basis and prior depreciation is wiped out. Common estate-planning move for long-hold landlords.
3. Convert to primary residence — living in it for 2 of the last 5 years qualifies you for Section 121 exclusion, but the exclusion doesn't apply to the depreciation portion (post-2009 rule). You'd exclude the appreciation gain but still owe recapture.
4. Installment sale — spread the gain over several years but not the recapture itself (recapture is due in year of sale even on installment).

Illegitimate: NOT claiming depreciation to avoid recapture. Doesn't work — IRS still treats it as claimed.

What about cost segregation?

If you used a cost segregation study to accelerate depreciation on shorter-life components (5, 7, or 15 year property), those components are subject to Section 1245 recapture (not 1250). Section 1245 recapture is at your ordinary income rate — up to 37% federal.

This is why the cost-seg recapture bite at sale can be worse than the up-front tax savings suggested. Long-hold + 1031 mitigate it; short-hold + straight sale amplify it.

Track depreciation from day one

Recapture at sale is the biggest gotcha in rental taxation. Your defense is a clean depreciation record. Okoniq Property Hub stores your annual depreciation schedule and cost-segregation components so the recapture at sale is arithmetic, not archaeology. Related: Section 179 vs bonus depreciation, 1031 exchanges, stepped-up basis explained, and the Taxes & Accounting hub.

Frequently asked questions

Does Section 121 exclusion cover depreciation?

No. If you convert a rental to a primary residence and qualify for the $250K/$500K Section 121 exclusion, the exclusion applies to the appreciation portion of gain — but any depreciation claimed after May 6, 1997 must be recaptured and taxed. You get the exclusion on the appreciation, recapture on the depreciation.

What's the 25% cap really?

The 25% is a MAXIMUM federal rate on unrecaptured Section 1250 gain. If your marginal rate is lower (say you're in the 12% bracket), recapture is taxed at your marginal rate up to 25%. Most landlords sitting on a rental sale are pushed into higher brackets by the sale itself, so 25% is what applies.

Do I owe state tax on recapture too?

Usually yes. Most states don't distinguish between recapture, capital gain, and ordinary income — everything's taxed at state ordinary income rates. Adds 5-13% depending on state.

Not tax advice. Depreciation recapture at sale often calls for a CPA in the transaction year. Okoniq Property Hub keeps the underlying schedules ready. Get started free.

FAQ

How much is depreciation recapture taxed when I sell my rental property?

Depreciation recapture is taxed at a maximum federal rate of 25% under Section 1250, plus your state's ordinary income tax rate (typically 5–13%), and potentially an additional 3.8% Net Investment Income Tax if your income exceeds certain thresholds.

Can I reduce my recapture tax bill by claiming less depreciation each year?

No — the IRS recaptures depreciation that was "allowed or allowable," meaning even if you never claimed a single dollar of depreciation during ownership, you still owe recapture tax at sale based on what you should have deducted.

If I did a cost segregation study, does that change my recapture tax?

Yes — accelerated depreciation from shorter-life components (5, 7, or 15 years) triggers Section 1245 recapture at your ordinary income rate, which can be as high as 37% federal, rather than the 25% cap that applies to building depreciation under Section 1250.

Does a 1031 exchange erase my depreciation recapture permanently?

No — a 1031 exchange defers both capital gains and depreciation recapture to your replacement property; the recapture liability carries forward and will be due when you eventually sell without exchanging, unless you hold the property until death and your heirs receive a stepped-up basis.