Depreciation is the deduction that pays you every year you own a rental, and the bill it quietly runs up comes due the day you sell. That bill is depreciation recapture. Every dollar you wrote off against rent over the years lowered your cost basis, and a lower basis means a larger taxable gain at the closing table. Recapture is the part of that gain the IRS taxes separately, on its own rules, and it surprises landlords who only ever thought about the deduction going in.
The good news is that for a typical small landlord who never ran a cost segregation study, the mechanics are narrower than the internet makes them sound. Most of the scary language about “ordinary-income recapture” does not apply to your building. Here is what actually does, worked on a real sale, plus the one trap that bites people who thought skipping depreciation kept them out of this. For the wider context of how this fits the rest of your landlord return, the rental property taxes guide is the place to start.
Recapture starts with the basis you wore down
When you bought the property, you set a cost basis: the price plus most of your buying closing costs, minus the value of the land. Every year you depreciated the building, that basis dropped. The running total of those deductions is your accumulated depreciation, and it is the exact number recapture is computed on. If you are fuzzy on how that annual figure is built, the 27.5-year depreciation math guide walks the inputs.
Adjusted basis at sale is the original basis minus all that accumulated depreciation. Your total gain is the sale price (net of selling costs) minus the adjusted basis. That total gain then splits into two pieces taxed at two different rates, and the split is the whole point of this page.
The two slices of your gain
Your total gain divides like this:
- Unrecaptured section 1250 gain. This is the portion of your gain equal to the depreciation you took (or were allowed to take) on the building. It is taxed at your ordinary rate but capped at 25%. The cap is why this is gentler than people fear: you deducted at your full ordinary rate for years and repay that slice at no more than 25% later, with the timing in your favor.
- Long-term capital gain. Whatever gain is left above your accumulated depreciation, the appreciation in the property's value, is taxed at the long-term capital gains rate, which for most landlords is 0%, 15%, or 20% depending on income.
Notice what is not on this list for a normal residential building: ordinary-income recapture. That is section 1245, and it only touches personal property and anything a cost segregation study carved out of the building into shorter recovery classes. Several big tax sites blur this and tell small landlords their whole depreciation gets taxed as ordinary income. For straight-line depreciation on the building, it does not.
A worked sale, in real dollars
Say you bought a duplex for $340,000. The assessor's split put the land at $90,000, so your building basis was $250,000. You depreciated it straight-line over 27.5 years, roughly $9,090 a year. After 12 years you have claimed about $109,000 in depreciation.
Now you sell for $470,000 and pay $30,000 in selling costs, so your net sale price is $440,000. Your adjusted basis is the original $340,000 minus $109,000 of accumulated depreciation, which is $231,000. Total gain: $440,000 minus $231,000, or $209,000.
That $209,000 splits in two. The first $109,000, matching your accumulated depreciation, is unrecaptured section 1250 gain, taxed at up to 25%, so at the cap that is about $27,250. The remaining $100,000 is long-term capital gain on the appreciation; at a 15% rate that is $15,000. The recapture is the bigger surprise of the two, and it exists entirely because you took deductions you were glad to take for 12 years. Worth taking anyway: you sheltered roughly $109,000 of rental income at ordinary rates and you are repaying that slice at a capped rate years later.
The allowed-or-allowable trap
Here is the rule that catches people who thought they were being conservative. The tax code reduces your basis by depreciation allowed or allowable. Allowed means what you actually claimed. Allowable means what you could have claimed under the rules. The IRS uses whichever is larger.
So if you owned that duplex for 12 years and never depreciated it once, the IRS still treats your basis as if you had taken the full $109,000. You get hit with the recapture on $109,000 of depreciation you never deducted. You lose the deduction and pay the bill. That is the single most expensive way to handle this line.
If that is your situation, it is fixable. Missed depreciation is usually corrected with a Form 3115 change in accounting method, which lets you catch up the deductions you skipped rather than amending a decade of returns. The mechanics of that fix get their own treatment in forgot to take depreciation on your rental, and it is a filing to hand a CPA rather than attempt solo.
Where it gets reported, and what defers it
The sale of a rental gets reported on Form 4797, with the recapture mechanics flowing through Part III, and the unrecaptured 1250 gain is computed on a worksheet in the Schedule D instructions before it lands on your return. The line-by-line of that reporting is its own job; the Form 4797 walkthrough covers it, and the broader picture of taxes at sale lives in selling a rental property.
Two moves change the recapture math instead of just reporting it. A 1031 exchange defers the recapture and the capital gain by rolling them into a replacement property; it is deferral, not erasure. And if you hold the property until you die, your heirs get a stepped-up basis, which is why inheriting a rental can wipe the recapture clean in a way selling never does. Both are decisions to model before you list, with numbers in front of you.
The number recapture is built on should not be a scavenger hunt
Every figure above hangs on one input: accumulated depreciation, the exact running total recapture is computed against. In a spreadsheet that number is reconstructed from 12 years of old returns, the year someone forgot to carry forward, and a basis split nobody wrote down. That is precisely the reconstruction that goes wrong under deadline. rents.ai tracks the straight-line MACRS schedule per property and keeps accumulated depreciation current in your dashboard, so the number is already sitting there when you sell instead of buried in a drawer. It does not file Form 4797 and it does not run the sale calculation; what it gives you is a depreciation total that foots, attached to the records that prove it. If you want to pressure-test the annual figure feeding that total, the depreciation calculator runs the same mid-month convention.
The IRS treatments behind all of this are Publication 544 (sales of business property) and Publication 527 (residential rental property), with the reporting on Form 4797. They are dry, but they are the primary source every other article is paraphrasing.
A footnote in the register it deserves: these are estimates to organize your year for your CPA, not tax advice. Basis splits, cost-seg carve-outs, the exact 1250 worksheet, and anything involving a prior-year fix have exceptions this guide skips. Bring your CPA clean records and let them make the rulings.