Depreciation is one of the best tax breaks a landlord gets. Every year you own a rental, you deduct part of the building's cost, even if the property is quietly gaining value. The catch arrives when you sell. The IRS asks for part of that benefit back through depreciation recapture, and many landlords do not see it coming until the closing statement is signed.
Note: This article is general education, not tax advice. Recapture rules interact with your income, filing status, state taxes and the history of each property, so consult a qualified tax professional before you sell, exchange or transfer a rental.
This guide explains how rental depreciation works, how recapture is taxed, and how it can be deferred. It is part of our rental management guides for landlords who run their own properties.
How depreciation works on a residential rental
According to IRS Publication 527, residential rental property is depreciated over 27.5 years under the General Depreciation System. IRS Publication 946 confirms the method is straight line with a mid-month convention, which means you deduct roughly the same amount every year, with a partial year in the month you place the property in service and the month you sell.
Only the building is depreciable. Publication 527 states that you cannot depreciate the cost of land because land does not wear out or get used up. So the first step is splitting your purchase price between land and building, often using the county assessor's ratio or an appraisal.
Other items depreciate faster. Publication 527 lists appliances, carpeting and furniture used in a residential rental as 5-year property. Improvements such as a new roof follow the recovery period of the property they improve, so a roof on a rental house is generally another 27.5-year asset.
The basic formula for the building looks like this:
- Annual Depreciation = (Purchase Price + Capitalized Closing Costs - Land Value) / 27.5
- Adjusted Basis = Original Basis + Improvements - Accumulated Depreciation
Most landlords claim this deduction on Schedule E along with their other rental expenses. If you want a refresher on what else belongs there, see our guide to the tax deductions every landlord should know on Schedule E.
The "allowed or allowable" rule catches landlords who skipped depreciation
Some landlords never claim depreciation, either by mistake or because they think it will help them avoid recapture later. It does not work that way. IRS Publication 946 says you must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. If you do not claim depreciation you were entitled to, you must still reduce your basis by the full allowable amount.
Publication 544 applies the same idea at sale: the greater of depreciation allowed or allowable is generally used to figure recapture. In plain terms, you can owe recapture tax on deductions you never took. That is the worst of both worlds.
There is a fix. According to Publication 946, you generally file Form 3115, Application for Change in Accounting Method, to change your depreciation method, and using an impermissible method on two or more consecutive returns counts as a method you can change. This can let you catch up missed depreciation in the current year instead of amending every old return. Ask your preparer whether it fits your situation, ideally well before a sale. Skipped depreciation is also one of the issues covered in our article on landlord tax mistakes that can trigger an IRS audit.
How depreciation recapture is taxed when you sell
Your gain is the amount you realize minus your adjusted basis. Because depreciation lowered your basis, it raises your gain dollar for dollar, and the tax code sorts that gain into buckets taxed at different rates.
Unrecaptured Section 1250 gain on the building
Buildings are Section 1250 property. Publication 544 explains that if you hold Section 1250 property longer than one year and depreciate it with the straight-line method, there is no "additional depreciation," so the classic ordinary income recapture under Section 1250 does not apply to a typical residential rental.
Instead, the depreciation portion of your gain becomes unrecaptured Section 1250 gain. Publication 544 defines it as the part of any long-term capital gain on real property that is due to depreciation. IRS Tax Topic 409 states it is taxed at a maximum 25% rate. If your ordinary income bracket is lower than 25%, that portion is taxed at the lower rate. You figure it on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions.
Section 1245 recapture on appliances and cost-segregated components
Personal property used in the rental, such as appliances, carpeting and furniture, is Section 1245 property. Publication 544 states that gain on Section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. That means it is taxed at your regular income tax rate, not capped at 25%.
This matters most for landlords who used cost segregation or bonus depreciation. A cost segregation study reclassifies parts of a building into shorter-lived property, and much of that becomes Section 1245 property. Under the 2025 federal tax law, Public Law 119-21, IRS Publication 946 reports that the 100% special depreciation allowance was restored for qualified property acquired and placed in service after January 19, 2025. Bigger deductions now mean bigger recapture later.
The remaining gain is long-term capital gain
Any gain above your total depreciation is generally taxed at long-term capital gain rates of 0%, 15% or 20%, depending on taxable income. For the 2026 tax year, the 0% rate applies up to $98,900 of taxable income for married couples filing jointly and $49,450 for single filers, with the 20% rate starting above $613,700 and $545,500 respectively. These thresholds are adjusted each year, so check the current figures for the year you sell.
The 3.8% net investment income tax may apply on top
According to the IRS questions and answers on the net investment income tax, net investment income includes rental income and capital gains, along with income from passive activities. The tax is 3.8% on the lesser of your net investment income or the amount your modified adjusted gross income exceeds $250,000 for married filing jointly, $200,000 for single or head of household, or $125,000 for married filing separately. The IRS notes these thresholds are not indexed for inflation.
A large sale can push a landlord over the threshold for that one year. Real estate professionals who materially participate may be treated differently, which is a fact-specific question for your tax professional.
| Portion of gain | What it covers | Federal rate |
|---|---|---|
| Section 1245 recapture | Depreciation on appliances, carpeting, furniture and many cost-segregated components | Ordinary income rates |
| Unrecaptured Section 1250 gain | Straight-line depreciation on the building and structural improvements | Maximum 25% |
| Long-term capital gain | Gain above total depreciation | 0%, 15% or 20% |
| Net investment income tax | May apply to the whole gain if income exceeds the threshold | 3.8% additional |
A worked example of depreciation recapture on a rental sale
The numbers below are illustrative and rounded to keep the math readable. A real return uses exact mid-month figures, capitalized closing costs and improvement records.
- Purchase. You buy a single-family rental for $300,000. You allocate $60,000 to land and $240,000 to the building.
- Annual depreciation. $240,000 / 27.5 = about $8,727 per year.
- Accumulated depreciation. After about 10 years, you have claimed roughly $87,000.
- Adjusted basis. $300,000 - $87,000 = $213,000.
- Sale. You sell for $400,000 and pay $25,000 in commissions and closing costs, so the amount realized is $375,000.
- Total gain. $375,000 - $213,000 = $162,000.
Now split the gain:
| Bucket | Amount | Illustrative federal tax |
|---|---|---|
| Unrecaptured Section 1250 gain (up to 25%) | $87,000 | Up to $21,750 |
| Long-term capital gain (assume 15%) | $75,000 | $11,250 |
| Net investment income tax (if fully above threshold) | $162,000 | Up to $6,156 |
| Total | $162,000 | Up to about $39,156 |
The formula behind the first line is simple: Recapture Tax = Unrecaptured Section 1250 Gain x 25% (at most). If this landlord had never claimed depreciation, the result would be the same, because the $87,000 was allowable. They would simply have missed about $87,000 of deductions along the way.
Two more points. If your total gain is smaller than your accumulated depreciation, only the actual gain is taxed in the 25% bucket. And if you sell on an installment basis, Publication 544 says any Section 1245 or 1250 ordinary income recapture is taxable in the year of sale even if you receive no payments that year. Our toolkit for structuring and closing seller financing on a property sale covers the deal side of installment sales.
How a 1031 exchange defers depreciation recapture
A like-kind exchange under Section 1031 lets you swap one investment or business real property for another and postpone the gain, including the depreciation portion. The deferred gain carries into the replacement property through a lower basis, so recapture is postponed, not erased. Publication 544 notes that like-kind treatment now applies only to real property held for investment or business use.
Recapture can still surface in an exchange. If you receive cash or other non-like-kind property (often called boot), Publication 544 explains that part of the gain may be recognized, and ordinary income recapture rules can apply to it. Appliances and other personal property no longer qualify for like-kind treatment, so they may produce taxable gain even in an otherwise clean exchange. Deadlines are strict, so read our guide to 1031 exchange rules, deadlines and common mistakes for rental owners before you list.
What happens to depreciation recapture at death
Publication 544 states that when a taxpayer dies, no gain is reported on depreciable real or personal property transferred to the estate or a beneficiary. Under Publication 551, an heir's basis is generally the property's fair market value on the date of death (or the alternate valuation date if the estate elects it).
This step-up in basis generally wipes out the built-in gain, including the accumulated depreciation, for the heir. The heir then starts a fresh depreciation schedule on the stepped-up building value. Ownership structure, community property rules and estate tax filings can change the details, so heirs should confirm their basis with a professional. Our guide on what to do when you inherit a rental property walks through the practical steps.
State taxes can add to the bill
Many states with an income tax treat capital gains, including the depreciation portion, as ordinary income, while a few states have no income tax at all. If the property is in a different state from where you live, you may owe tax in both and claim a credit in one.
Records to keep so recapture is calculated correctly
Publication 544 says you must keep permanent records of the facts needed to figure depreciation allowed or allowable, including the date and manner of acquisition, cost or other basis, depreciation, and every other adjustment to basis. Keep them for as long as you own the property and for several years after you sell.
- Closing statement from the purchase, plus capitalized closing costs
- Your land and building allocation and how you supported it (assessor ratio or appraisal)
- Every depreciation schedule and Form 4562 you filed
- Receipts and invoices for improvements, separated from ordinary repairs
- Any cost segregation study and the asset list it produced
- Records of any Form 3115 filed to catch up missed depreciation
- For exchanged property, the Form 8824 and the carried-over basis from the old property
- The sale closing statement showing price, commissions and selling costs
If you are still tracking receipts in folders and shoeboxes, our article on how expense tracking software simplifies tax prep for landlords shows a cleaner approach.
Frequently asked questions
What is the depreciation recapture tax rate on rental property?
Depreciation on the building is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25%. Depreciation on appliances, furniture and other Section 1245 property is taxed at ordinary income rates, and the 3.8% net investment income tax may apply on top.
Do I owe depreciation recapture if I never claimed depreciation?
Yes. The IRS reduces your basis by the depreciation allowed or allowable, whichever is greater, so recapture can apply to deductions you never took. Form 3115 may let you catch up missed depreciation before you sell.
Can I avoid depreciation recapture when selling a rental property?
A 1031 exchange can defer it into a replacement property, and heirs who inherit the property generally receive a step-up in basis that eliminates it. Selling at a loss or for less than your accumulated depreciation also limits it.
Did the 2025 tax law change depreciation recapture?
The 25% maximum rate on unrecaptured Section 1250 gain and the Section 1245 ordinary income rule were not changed by Public Law 119-21, based on current IRS guidance. The law did restore 100% bonus depreciation for qualified property acquired after January 19, 2025, which can increase ordinary income recapture at a later sale.
What to do next
Depreciation recapture catches landlords off guard less because the rules are obscure and more because the records needed to calculate it are scattered across years of closing statements, receipts, improvement invoices and preparer files. When a landlord cannot show what was spent, when and on which property, the adjusted basis gets guessed, and guesses at sale time cost real money.
Shuk keeps that paper trail together as you go. Schedule E-aligned expense organization lets you tag expenses by property, vendor and date, attach digital receipts, and mark items as depreciable as a label for your accountant. Property Documents inside each property store closing statements, depreciation schedules and cost segregation reports in one place. The Profit and Loss and Expense Tracker reports export to Excel and PDF, and unlimited users with roles and permissions let you invite your accountant with view access to financial data.
At as low as $2 per unit per month, with no setup fees and no contract, and with White Glove Onboarding included at no additional cost, Shuk makes keeping sale-ready basis and improvement records for every property feasible for landlords and property managers up to 200 units.
Book a demo at shukrentals.com/book-a-demo to see how Schedule E-aligned expense organization, Property Documents and exportable reports work together so your preparer has what they need when you sell.
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