If you’re asking how to avoid depreciation recapture on a rental, the honest answer is that you usually can’t avoid it on a taxable sale, but you can defer it with a 1031 exchange, eliminate it by holding the property until death, and shrink it with released passive losses and good timing. What you can’t do is skip it by not claiming depreciation.
Below I walk through how recapture on rental property is taxed, a worked example with real numbers, and each strategy investors ask me about, including the ones that work less well than people think.
What is depreciation recapture on rental property?
Depreciation recapture on rental property is the tax you pay at sale on the gain that comes from the depreciation you deducted while you owned it. Every dollar of depreciation lowers your basis, so it shows up again as gain when you sell.
The Code treats that part of the gain less favorably than ordinary long-term capital gain. On a typical rental, the building’s straight-line depreciation becomes “unrecaptured §1250 gain,” taxed at your ordinary rate but never more than 25% (IRC §1(h)(1)(E)).
Recapture can’t exceed your actual gain. If you sell for less than your original cost, only the gain you actually have is taxed this way.
How is depreciation recapture taxed?
Depreciation recapture is taxed at different rates depending on what kind of property was depreciated. The building, cost segregation components, and land improvements each follow their own rule.
| What was depreciated | Type | How that gain is taxed |
|---|---|---|
| Building (27.5- or 39-year straight-line) | Unrecaptured §1250 gain | Ordinary rates, capped at 25% |
| 5- and 7-year components (appliances, carpet, furniture) | §1245 property | Ordinary income up to the depreciation taken |
| 15-year land improvements (fencing, paving, landscaping) | §1250 property | Bonus or accelerated depreciation above straight-line is ordinary income; the rest is unrecaptured §1250 gain |
| Gain above all depreciation taken | §1231 gain | Long-term capital gain rates of 0%, 15%, or 20% |
How much is depreciation recapture on a typical rental?
On a typical long-held rental, the recapture tax is the depreciation you’ve taken times 25% at most. Here is a simple example with no cost segregation.
- Purchase price $400,000: $80,000 land and $320,000 building.
- Straight-line depreciation claimed over the years: $100,000.
- Adjusted basis: $400,000 − $100,000 = $300,000.
- Sale price after selling costs: $550,000. Total gain: $550,000 − $300,000 = $250,000.
- Unrecaptured §1250 gain: $100,000 × 25% = $25,000.
- Remaining §1231 gain: $250,000 − $100,000 = $150,000 × 20% = $30,000 (or $22,500 at 15%).
- Net investment income tax: $250,000 × 3.8% = $9,500.
At the top rates, and assuming your other income already puts you over the NIIT threshold, that’s $25,000 + $30,000 + $9,500 = $64,500 of federal tax, and $25,000 of it is recapture. Texas has no state income tax, so for a Texas seller that’s the whole bill.
Can I avoid depreciation recapture by not claiming depreciation?
No, because your basis is reduced by depreciation “allowed or allowable,” meaning the depreciation you were entitled to take, whether or not you took it (IRC §1016(a)(2)). Skipping depreciation gives up the deduction and still leaves you with the recapture.
I see this most with self-prepared returns and properties a prior preparer never put on the depreciation schedule. If the missed depreciation spans two or more consecutive filed returns, Form 3115 lets you take all of it in one year without amending. If it’s only one year, an amended return usually fixes it.
Does a 1031 exchange avoid depreciation recapture?
A 1031 exchange defers depreciation recapture rather than eliminating it, because the deferred gain, including the recapture, carries into the replacement property’s basis. If you keep exchanging and hold the last property until death, the deferral becomes permanent.
There’s one catch for cost-segregated properties. Recapture on §1245 components is recognized in an exchange unless the replacement property has enough §1245 property to absorb it (IRC §1245(b)(4)), which can bite when you trade a furnished short-term rental for land.
The deadlines are strict: 45 days to identify and 180 days to close. My guide to the 1031 exchange timeline covers each step.
Does depreciation recapture go away when you die?
Yes, because your heirs receive the property with a basis equal to its fair market value at your death (IRC §1014), and recapture doesn’t apply to a transfer at death (IRC §§1245(b)(2), 1250(d)(2)). The depreciation you deducted for decades is never taxed.
In Texas and other community property states, both halves of community property step up when the first spouse dies (IRC §1014(b)(6)). That’s a big reason I tell married clients to confirm which rentals are community and which are separate.
Gifts are the opposite. A gift during life carries over your basis and the built-in recapture to the recipient (IRC §1015), so giving a low-basis rental to your kids usually costs them the step-up.
Does an installment sale defer depreciation recapture?
Only partly, because any recapture income, meaning §1245 ordinary recapture and §1250 depreciation above straight-line, is taxed in the year of sale no matter how little cash you receive (IRC §453(i)).
Unrecaptured §1250 gain from the building’s straight-line depreciation isn’t recapture income for this purpose. It’s reported as you collect payments, and it comes out before the 15% or 20% gain does (Reg. 1.453-12).
So on a seller-financed sale of a cost-segregated property, the first-year tax can exceed the down payment. I run that number before a client agrees to carry a note.
Can I avoid depreciation recapture by moving into the rental?
No, because the home sale exclusion of $250,000 ($500,000 married filing jointly) doesn’t cover gain equal to depreciation taken after May 6, 1997 (IRC §121(d)(6)). That depreciation is taxed as unrecaptured §1250 gain even if the rest of the gain is excluded.
Moving into a former rental also brings the nonqualified use rule. Gain allocable to rental years after 2008 that came before you moved in generally can’t be excluded (IRC §121(b)(5)).
The better order is residence first, rental second. If you sell within three years of moving out, the full exclusion is usually available except for the depreciation.
Can a charitable remainder trust avoid depreciation recapture?
A charitable remainder trust spreads the tax out rather than avoiding it. You contribute the property before any sale is arranged, the trust sells it without paying tax, and you receive an income stream for life or a term of years.
The gain doesn’t disappear. Distributions carry out the trust’s income in tiers, ordinary income first and then capital gain, including the 25% portion, so you pay tax as you receive payments. You also get a partial charitable deduction, and the remainder goes to charity.
Mortgaged property is difficult to put in a CRT, and the trust is irrevocable. It fits investors with real charitable intent.
Do opportunity zones defer depreciation recapture?
Opportunity zones defer capital gain only, so the ordinary-income pieces of recapture, §1245 recapture and §1250 depreciation above straight-line, can’t be rolled into a Qualified Opportunity Fund. Unrecaptured §1250 gain is part of your §1231 gain and can generally be invested within 180 days of the sale (Reg. 1.1400Z2(a)-1(b)(11)).
Even then it’s a deferral, not forgiveness. The original gain comes back with its character intact, and the big benefit is that appreciation on the fund investment itself can be tax-free after 10 years (IRC §1400Z-2, as amended in 2025).
The 2025 law made opportunity zones permanent, but the timing rules depend on when you invest. Gain invested in 2026 or earlier is still included on December 31, 2026, so a 2026 investment buys almost no deferral. For investments made after 2026, the deferred gain comes due five years after you invest (or earlier if you sell), with a 10% basis increase at five years, or 30% for a qualified rural fund. Talk to me before you invest.
Can suspended passive losses offset depreciation recapture?
Yes, a fully taxable sale of your entire interest in a rental activity to an unrelated buyer releases that activity’s suspended passive losses, which can then offset the gain, including recapture, and your other income (IRC §469(g)).
A seller carrying $60,000 of suspended losses deducts all $60,000 in the year of sale, which can cover much of the recapture tax. That’s why a straight sale sometimes beats a 1031 exchange, which doesn’t release the losses.
If you’ve been carrying losses because of the passive rules, see whether rental losses can offset W-2 income before you decide how to sell.
Does cost segregation increase depreciation recapture?
Cost segregation moves part of the building into 5-, 7-, and 15-year property, so more of the gain can be ordinary income instead of 25% gain if you sell. The §1245 recapture on the short-life components is limited to the gain allocated to them, though.
Suppose $60,000 of 5-year components were fully expensed with bonus depreciation. If a reasonable, supportable allocation puts those worn components at $15,000 of the sale price, ordinary recapture is $15,000, not $60,000, and the other $45,000 shows up as gain on the building and land instead.
That allocation needs support, and I document it at sale. The Section 1231 vs 1245 property guide explains how each piece is classified.
Is cost segregation still worth it if I’ll pay recapture later?
Usually, yes, when the deductions are usable and you’ll hold for several years. You deduct at ordinary rates now, pay back later at the same or a lower rate, and keep the use of the money in between.
The recapture is also deferred if you exchange into property with enough §1245 property, and it goes away entirely if you hold until death. It works against you mainly on a quick sale, or when passive loss rules leave the deductions suspended.
For what a study runs and when the math works, see cost segregation study cost.
Does the 3.8% net investment income tax apply to recapture?
Generally, yes. The net investment income tax applies to the gain on a rental sale, recapture included, to the extent your modified AGI exceeds $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately (IRC §1411). Those thresholds aren’t indexed for inflation.
The main exception is a real estate professional who spends more than 500 hours a year in rental real estate, under a safe harbor that treats the rental gain as trade or business income (Reg. 1.1411-4(g)(7)). If you qualify, confirm your hours for the year of sale before closing.
Planning a sale
The time to plan for recapture is before you sign a contract, while every option is still open. Real estate is most of my practice, and I work with investors nationwide. Book a call or call (832) 594-0339, and read about my real estate CPA services and see my published fees.
General information under IRC §§1(h), 121, 453, 469, 1014, 1016, 1245, 1250, 1400Z-2 and 1411, current as of October 2026. Not advice for your specific situation.