Depreciation Recapture: The Hidden Tax That Can Surprise Real-Estate Investors

Many investors love depreciation — and for good reason. It’s one of the most powerful tools to reduce taxable income.
But when you sell a rental property, the IRS may require you to pay back some of those deductions. That’s called depreciation recapture, and if you’re not planning ahead, it can take a large bite out of your profit.

Here’s what every real-estate investor should understand.

1. What Is Depreciation Recapture?

When you sell a property that has been depreciated, the IRS “recaptures” the depreciation deductions you previously claimed by taxing that portion of your gain at up to 25%.
This applies whether you used straight-line depreciation or accelerated depreciation.

Example:
If you claimed $200,000 in depreciation over several years, you could owe up to $50,000 in recapture tax when you sell.

2. How to Reduce Recapture Liability

Investors can legally reduce or defer depreciation recapture through strategic planning:

• Use a 1031 exchange. Defers both capital gains and depreciation recapture.
• Hold for the long term. At death, the property receives a step-up in basis, eliminating recapture.
• Strategic timing. Sell in years where income is lower to reduce tax impact.
• Cost-segregation pairing. Accelerate depreciation now while planning future exchanges to defer the recapture.
• Installment sales. Spread taxable gain over multiple years instead of recognizing it all at once.

3. Plan Before You Sell

Most depreciation recapture surprises happen because investors call their CPA after they close the sale.
By working with a tax strategist before listing, you can explore timing strategies, reinvestment options, and 1031 exchange opportunities that significantly reduce your tax hit.

Conclusion

Depreciation recapture doesn’t have to wipe out your profit. With proactive planning, you can legally reduce or defer this tax — keeping more of your equity compounding for the future.