Depreciation is the gift that gives during ownership and takes at sale. The deductions that sheltered your rental income year after year get "recaptured" when you sell — at a rate up to 25%, higher than the capital gains rate — and on a long-held property that recapture can be the single biggest tax you face. It's also one of the least understood parts of real estate taxation, and a major reason a 1031 exchange saves so much. This guide explains depreciation recapture in full: what it is, why it's rated higher, how it's calculated, how a 1031 defers it, and how to plan for it.
What Depreciation Recapture Is
While you own a rental, you deduct depreciation each year, which lowers your taxable income and also lowers your adjusted basis in the property. When you sell, the gain attributable to that accumulated depreciation is "recaptured" — taxed as unrecaptured Section 1250 gain rather than at ordinary capital gains rates.
In essence, the IRS lets you defer income through depreciation deductions during ownership, then collects on the benefit when you sell. The recapture is the mechanism for that collection, and it applies to the depreciation you took (or were allowed to take) regardless of whether you actually claimed it.
Recapture catches many long-term landlords by surprise, because they think of their gain as just appreciation. In reality, a large portion of the gain on a long-held, depreciated property is recapture, taxed at a higher rate.
How Depreciation Works During Ownership
Residential rental property is depreciated over 27.5 years and commercial property over 39 years, on a straight-line basis. Each year you deduct a portion of the building's value (not the land, which isn't depreciable), reducing your taxable rental income.
This deduction is one of real estate's great tax advantages — it can shelter much or all of your rental income from tax during ownership. But every dollar of depreciation also reduces your basis by a dollar, setting up the recapture on sale.
Some investors accelerate depreciation through cost segregation, which front-loads deductions by classifying components as shorter-lived property. This increases early deductions but also increases the recapture (and can include higher-rate Section 1245 recapture on personal-property components) when you sell.
Unrecaptured Section 1250 Gain
For real property, the depreciation recapture is technically "unrecaptured Section 1250 gain," taxed at a maximum federal rate of 25%. The name reflects the Code section governing real-property depreciation recapture, and the "unrecaptured" label distinguishes it from the full ordinary-income recapture that applies to some personal property.
The 25% rate is a maximum — if your ordinary rate is lower, the recapture is taxed at your rate. But for most investment-property sellers with meaningful income, the 25% maximum applies to the recapture portion of their gain.
Section 1245 property (certain personal property, like equipment or components segregated out via cost segregation) can face full ordinary-income recapture at higher rates, which is a consideration if you've used cost segregation.
Why It's Taxed at a Higher Rate
Unrecaptured Section 1250 gain is taxed at up to 25%, above the 15–20% long-term capital gains rate. The higher rate recovers part of the benefit you received from the depreciation deductions, which offset income that might otherwise have been taxed at ordinary rates.
In effect, the tax code gives you a valuable deduction during ownership and asks for some of it back, at a higher rate, when you sell. The longer you held and the more you depreciated, the larger this higher-rated layer.
This is why recapture is often the biggest single tax on a long-held rental, and why deferring it through a 1031 exchange is so valuable for long-term landlords.
Calculating Recapture
To estimate your recapture, start with the total depreciation you've taken (or were allowed to take) on the property. That amount is generally your unrecaptured Section 1250 gain, taxed at up to 25%. The rest of your gain — the appreciation above your original cost — is taxed at capital gains rates.
For example, if you bought for $300,000, depreciated $100,000 down to a $200,000 basis, and sell for $500,000, your total gain is $300,000: $100,000 of recapture (taxed up to 25%) and $200,000 of appreciation (taxed at 15–20%).
Your CPA calculates the precise figures, including any cost-segregation effects, but this framework — depreciation taken equals recapture, the rest is appreciation — gives you a working estimate.
How a 1031 Defers Recapture
A 1031 exchange defers depreciation recapture along with the capital gain. Nothing is recognized at the exchange; the recapture exposure simply carries into the replacement property and is postponed until a future taxable sale.
This is a major part of the exchange's value, because recapture is taxed at the higher 25% rate. Deferring it keeps that tax invested and compounding, rather than surrendering up to a quarter of your depreciated basis to the IRS at sale.
The deferral works through carryover basis, covered next — your adjusted (depreciated) basis follows you into the replacement property, carrying the recapture exposure along with the rest of the deferred gain.
- Recapture taxes prior depreciation at up to 25% — often the biggest tax on a long-held rental.
- A 1031 defers recapture along with the capital gain via carryover basis.
- Deferral isn't elimination — a step-up at death erases the deferred recapture for heirs.
Carryover Basis and Recapture
In a 1031 exchange, you don't get a fresh basis in the replacement property. Your adjusted (depreciated) basis carries over, increased by any additional cash you invest. Because that low basis carries the deferred gain — including the recapture — the recapture exposure rides into the replacement property.
This means the recapture isn't erased; it's preserved in your new basis and recognized on a later taxable sale (unless eliminated by a step-up at death). The exchange postpones it, but the exposure travels with you.
Your CPA tracks this carryover basis and the embedded recapture across exchanges, which is why accurate basis records are essential — especially over a multi-exchange lifetime.
Continuing and Restarting Depreciation
After a 1031 exchange, you generally continue depreciating the carried-over basis on its existing schedule, and you depreciate any additional basis from new investment separately, as if it were newly placed in service. This lets you keep taking depreciation deductions on the replacement property.
The result is that you continue to enjoy depreciation's income-sheltering benefit on the replacement property, even as the deferred recapture from the relinquished property rides along in your basis. New depreciation you take on the replacement adds to future recapture, which a subsequent exchange could again defer.
These rules are technical, and the treatment of carried-over versus excess basis affects your deduction schedule. Your CPA handles the mechanics, but the practical upshot is that depreciation continues, and so does the cycle of deferral.
Recapture on Eventual Sale
If you eventually sell the replacement property outright, without exchanging again, the deferred recapture — along with the deferred capital gain — comes due. All those years of postponed recapture are recognized then, at up to 25%.
This is why a 1031 is a deferral, not an exemption: the recapture exposure accumulates across exchanges and is realized when you finally sell without exchanging. The longer the chain of exchanges, the larger the embedded recapture.
Planning the endgame is therefore important. Many long-term investors aim never to sell outright, instead exchanging until death so the embedded recapture and gain are eliminated by a step-up in basis.
How the Step-Up Eliminates Recapture
The step-up in basis at death is what turns deferral into elimination. When you die holding the replacement property, your heirs generally take a basis equal to the property's fair-market value on the date of death — wiping out both the deferred capital gain and the deferred depreciation recapture.
Your heirs could then sell shortly after inheriting with little or no taxable gain or recapture. Decades of deferred recapture, accumulated across multiple exchanges, can be eliminated entirely.
This is the capstone of the "swap till you drop" strategy, and it's especially powerful for recapture, which is taxed at the higher 25% rate. Coordinating the final exchanges and the estate plan with your CPA and attorney is how investors capture this benefit.
Recapture, Boot, and the Order of Taxation
When partial gain is recognized in an exchange — for example, because you took boot — recapture is generally recognized first. This means even a modest amount of boot can be taxed at the 25% recapture rate rather than the lower capital gains rate, making it costlier than you might expect.
The lesson is that if your gain is heavily weighted toward recapture (as on a long-held rental), avoiding boot is especially important, because any boot you do take is taxed at the higher rate first. Structuring a zero-boot exchange preserves the deferral of the high-rated recapture.
Your CPA accounts for this ordering on Form 8824, ensuring recognized gain is characterized correctly. But the planning takeaway is clear: on a heavily depreciated property, treat boot with extra caution.
Recapture and Cost Segregation
Cost segregation studies accelerate depreciation by classifying parts of a property as shorter-lived assets, front-loading deductions. This boosts early tax savings but also increases recapture on sale — and some segregated components are Section 1245 property subject to higher ordinary-income recapture, not the 25% Section 1250 rate.
If you've used cost segregation, your recapture picture is more complex, with potentially higher-rated components. A 1031 exchange can still defer the gain, but the interaction with segregated property and bonus depreciation requires careful handling.
This is firmly CPA territory. If you've accelerated depreciation, work closely with your accountant on how recapture is calculated and deferred in an exchange, because the standard 25% framework may not capture the full picture.
A Worked Recapture Example
A concrete example clarifies how recapture dominates a long-held property. Suppose you bought a rental for $400,000 (say $300,000 building, $100,000 land) twenty years ago and depreciated the building by roughly $218,000 over that time, dropping your adjusted basis to about $182,000. You now sell for $700,000.
Your total gain is about $518,000. Of that, roughly $218,000 is depreciation recapture — taxed at up to 25%, for as much as $54,500 — and the remaining $300,000 is appreciation, taxed at 15–20% capital gains rates. Add the 3.8% NIIT and any state tax, and the recapture alone is one of the largest pieces of a substantial bill.
Notice that the recapture ($54,500 at 25%) is comparable to or larger than the capital gains tax on the $300,000 of appreciation ($45,000–$60,000 at 15–20%). On a property held even longer, with more depreciation, recapture would dominate further.
A 1031 exchange defers the entire amount — recapture, capital gains, NIIT, and state tax — carrying your $182,000 basis into the replacement property. Instead of paying well over $100,000 in combined tax, you reinvest the full proceeds and keep the high-rated recapture deferred. Figures are illustrative, but they show why recapture is the heart of the deferral on a long-held rental.
Common Recapture Mistakes and Misunderstandings
Several recapture misunderstandings cost investors money. The most damaging is not realizing recapture exists — selling a long-held rental expecting only capital gains tax and being blindsided by a large recapture bill at 25%. Understanding it in advance is the first step to planning around it.
A second mistake is failing to claim depreciation during ownership, believing it avoids recapture. It doesn't — recapture applies to depreciation you took or were allowed to take, so skipping it forfeits the deduction without avoiding the recapture. If you missed depreciation, your CPA can often correct it.
A third is taking boot on a heavily depreciated property without realizing recapture is recognized first, so the boot is taxed at the higher 25% rate. And a fourth is mishandling cost-segregated property, where some components face higher ordinary-income recapture that the standard 25% framework doesn't capture.
Each of these is avoidable with awareness and a good CPA. The overarching lesson is that recapture is a predictable, significant tax on long-held property — and that a 1031 exchange, structured to avoid boot, is the most effective way to defer it. Investors who understand recapture make better decisions about when and how to sell or exchange.
Coordinating With Your CPA
Because depreciation schedules, basis, recapture, and their carryover across exchanges are interrelated and technical, this is squarely CPA territory. Bring your depreciation history, basis records, and exchange documents to your accountant before closing, so the recapture is calculated and reported correctly.
Your CPA reports the exchange on Form 8824, tracks the carryover basis and embedded recapture into the replacement property, sets up the continuing and new depreciation schedules, and accounts for any boot at the recapture-first ordering. Over a multi-exchange lifetime, those records become essential.
Baker 1031 works alongside your CPA, not in place of them — sourcing and vetting replacement property and coordinating the exchange while your accountant handles the basis and recapture mechanics. The combination is what lets you defer the high-rated recapture cleanly and plan for its eventual elimination.
Frequently Asked Questions
What is depreciation recapture in a 1031 exchange?
It's the tax on the gain attributable to depreciation you took while holding the property. On sale it's taxed as unrecaptured Section 1250 gain at up to 25%. A 1031 exchange defers this recapture along with the capital gain, carrying it into the replacement property via carryover basis.
Why is recapture taxed at 25%?
Unrecaptured Section 1250 gain is capped at 25%, higher than the long-term capital gains rate, to recover part of the benefit of the depreciation deductions you took during ownership. On long-held rentals it's often the largest single tax layer.
How do I calculate depreciation recapture?
Start with the total depreciation you've taken (or were allowed to take) — that amount is generally your unrecaptured Section 1250 gain, taxed up to 25%. The rest of your gain (appreciation above original cost) is taxed at capital gains rates. Your CPA computes the precise figures.
Does a 1031 exchange eliminate recapture?
No — it defers it. The recapture exposure carries into the replacement property via carryover basis and is recognized on a later taxable sale, unless eliminated by a step-up in basis at death.
How does the step-up in basis affect recapture?
At death, your heirs generally take a basis equal to the property's fair-market value, which wipes out both the deferred capital gain and the deferred depreciation recapture. Decades of deferred recapture accumulated across exchanges can be eliminated entirely.
Can I keep depreciating after a 1031 exchange?
Generally yes. You continue depreciating the carried-over basis on its existing schedule and depreciate any additional basis from new investment separately. This continues the income-sheltering benefit, while new depreciation adds to future recapture that a later exchange could defer.
Is recapture taxed before capital gains when I take boot?
Yes. When partial gain is recognized — for example through boot — recapture is generally recognized first, so even a modest amount of boot can be taxed at the 25% recapture rate. On heavily depreciated property, this makes avoiding boot especially important.
How long is rental property depreciated?
Residential rental property is depreciated over 27.5 years and commercial property over 39 years, straight-line, on the building value (not the land). Each year's deduction lowers your basis and sets up the recapture on sale.
What is unrecaptured Section 1250 gain?
It's the technical name for real-property depreciation recapture — the portion of gain attributable to prior depreciation, taxed at a maximum of 25%. The Code section 1250 governs real-property recapture, distinguishing it from full ordinary-income recapture on certain personal property.
Does cost segregation increase my recapture?
Yes. Cost segregation accelerates depreciation by classifying components as shorter-lived assets, which boosts early deductions but increases recapture on sale — and some segregated components are Section 1245 property subject to higher ordinary-income recapture. Work with your CPA if you've used it.
Why does recapture surprise long-term landlords?
Because they think of their gain as just appreciation, when in fact a large portion of a long-held property's gain is recapture — taxed at the higher 25% rate. Years of depreciation deductions create a big recapture amount that's easy to overlook until the sale.
Is recapture always taxed at 25%?
25% is the maximum federal rate for unrecaptured Section 1250 gain; if your ordinary rate is lower, the recapture is taxed at your rate. For most investment-property sellers with meaningful income, the 25% maximum applies to the recapture portion.
Do I owe recapture if I never claimed depreciation?
Generally yes. Recapture applies to depreciation you took or were allowed to take, so failing to claim depreciation doesn't avoid recapture — it just forfeits the deduction. This is why claiming depreciation each year (and tracking it) is important; consult your CPA if you missed it.
How does a 1031 help with recapture specifically?
A 1031 defers the recapture — taxed at the higher 25% rate — along with the capital gain, keeping that tax invested and compounding. For long-held, heavily depreciated properties where recapture is the biggest layer, this is a major part of the exchange's value.
Who calculates and reports my recapture?
Your CPA. They calculate the recapture, track the carryover basis and embedded recapture into the replacement property, set up continuing and new depreciation schedules, and report everything on Form 8824 — including the recapture-first ordering if you took any boot.
Can recapture be larger than my capital gains tax?
Yes, frequently on long-held property. Decades of depreciation create a large recapture amount taxed at up to 25%, which can exceed the capital gains tax on the appreciation taxed at 15–20%. On a property held for many years, recapture is often the single largest component of the tax bill.
Does taking boot affect my recapture?
Yes — significantly. When partial gain is recognized through boot, recapture is generally recognized first, so the boot is taxed at the higher 25% rate. On a heavily depreciated property, this makes avoiding boot especially important to preserve the deferral of the high-rated recapture.
What happens to recapture across multiple exchanges?
The deferred recapture accumulates and carries forward through each exchange via carryover basis, along with new depreciation you take on each replacement property. It's all recognized if you eventually sell without exchanging — or eliminated entirely by a step-up in basis if you hold the final property until death.
Is land subject to depreciation recapture?
No. Land isn't depreciable, so it generates no depreciation and no recapture — only the building portion is depreciated and recaptured. This is why allocating basis between land and building matters, and why your depreciation (and recapture) is based on the building value, not the whole purchase price.
How does bonus depreciation affect recapture?
Bonus depreciation accelerates first-year deductions on certain property, increasing early tax savings but also increasing recapture on sale, and some bonus-depreciated components are Section 1245 property subject to higher ordinary-income recapture. If you've used bonus depreciation, work with your CPA on how it affects your recapture in an exchange.
Why is recapture central to the value of a 1031 exchange?
Because on long-held, heavily depreciated property — the kind investors most often exchange — recapture is frequently the largest tax layer, taxed at the higher 25% rate. Deferring it keeps a substantial, high-rated tax invested and compounding, and holding until a step-up at death can eliminate it entirely. Recapture is often the heart of the deferral.
Should I avoid depreciation to avoid recapture?
No. Depreciation is a valuable deduction that shelters income during ownership, and recapture applies whether or not you claim it (it's based on depreciation taken or allowed). Skipping depreciation forfeits the deduction without avoiding recapture. Claim it, track it, and defer the recapture through a 1031 exchange instead.
Glossary
- Depreciation Recapture
- Tax on gain attributable to prior depreciation, taxed up to 25% on real property.
- Unrecaptured Section 1250 Gain
- The real-property depreciation-recapture portion of gain, taxed at a maximum of 25%.
- Section 1245 Property
- Certain personal property (e.g., from cost segregation) subject to higher ordinary-income recapture.
- Adjusted Basis
- Cost plus improvements minus depreciation; lowered by each year's depreciation deduction.
- Carryover Basis
- The relinquished property's adjusted basis carried into the replacement property, preserving the recapture exposure.
- Straight-Line Depreciation
- Depreciating a building evenly over 27.5 years (residential) or 39 years (commercial).
- Cost Segregation
- A study that accelerates depreciation by classifying components as shorter-lived, increasing both early deductions and recapture.
- Step-Up in Basis
- The reset of basis to fair-market value at death, which can eliminate deferred recapture and gain for heirs.
- Form 8824
- The IRS form reporting a like-kind exchange, including recognized gain and recapture.
- Boot
- Taxable value received in an exchange; recapture is generally recognized first when boot is taxed.
- Bonus Depreciation
- An accelerated first-year deduction for certain property that can increase recapture on sale.
- Land vs. Building
- Only the building is depreciable; land is not, so basis allocation between them matters.
Sources & References
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
