What Depreciation Recapture Is and Why It Surprises Property Sellers
Sam's List Editorial | 2026-06-23
What Depreciation Recapture Is and Why It Surprises Property Sellers A real estate investor takes $90,000 of depreciation deductions over six years on a rental property. The deduction shelters $90,000 of income from tax. The investor feels like they got away with something. They didn't. The IRS pulls a meaningful chunk of it back when the property sells. That's depreciation recapture. This piece is a plain-English explainer of what recapture actually is, how the §1250 rules work for real property, and why the "allowed or allowable" language is the line that catches investors who tried to skip the deduction. The deduction the IRS gives, then takes back Depreciation is the tax code's way of letting an owner expense the cost of a long-lived asset over time rather than all at once. A residential rental depreciates over 27.5 years under the modified accelerated cost recovery system (MACRS), with straight-line treatment. A commercial property depreciates over 39 years. Each year of ownership, the depreciation deduction reduces taxable rental income. The deduction also reduces the property's basis — the number the IRS treats as the owner's investment in the property for purposes of computing gain on a future sale. That's the seed of the surprise. Every dollar of depreciation taken now is a dollar of basis lost later. When the property sells, the lower basis means more taxable gain — and the gain attributable to the depreciation is taxed at a different rate than a normal capital gain. The §1250 rate that catches sellers off guard For real property held more than one year, the gain on sale is generally taxed at long-term capital gains rates — 0%, 15%, or 20% depending on income, plus the 3.8% net investment income tax under IRC §1411 for higher-income taxpayers. The portion of the gain attributable to depreciation that was taken — called "unrecaptured §1250 gain" — is taxed at a maximum rate of 25% under IRC §1(h)(6). That's higher than the standard long-term capital gains rate. It's also lower than ordinary income, so it's not the worst-case scenario — but it surprises investors who expected the entire gain to be taxed at the 15% or 20% rate. The math on a typical situation: a property bought for $400K with $300K allocable to the building, depreciated for 10 years at the residential straight-line method. Accumulated depreciation: roughly $109,000. If the property sells for $700K, total gain is $409K (sale minus the depreciation-reduced basis). Of that, $109K is taxed at up to 25% under §1250, and the remaining $300K is taxed at the standard long-term capital...
