Depreciation Recapture
Depreciation recapture is the tax owed on gain attributable to depreciation deductions previously taken on a property, taxed at up to 25% for real estate.
Definition
Depreciation recapture is the IRS reclaiming some of the tax benefit you enjoyed from depreciation. While you own a rental, you deduct depreciation each year, lowering taxable income and your adjusted basis. When you sell, the gain attributable to those deductions is taxed, often at a higher rate than the rest of your gain.
For real property this is called unrecaptured Section 1250 gain and is taxed at a maximum federal rate of 25%, rather than the 0/15/20% long-term capital gains rates. If you took $200,000 of depreciation over the years, that $200,000 of gain can face up to 25% tax at sale, a meaningful bill on top of ordinary capital gains.
A 1031 exchange defers depreciation recapture along with capital gains tax, since the transaction is not treated as a sale. If the investor holds until death, a step-up in basis can eliminate the recapture liability entirely for heirs.
Key points
- Taxes gain created by prior depreciation deductions
- Real property recapture is taxed at up to 25% (unrecaptured Section 1250)
- Applies on top of ordinary capital gains tax
- Deferred by a 1031 exchange, eliminated by step-up at death
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.