What's the Difference Between Depreciation Recapture and Capital Gains Tax?

When you sell a rental property, you can face two separate types of tax on your profit: capital gains tax and depreciation recapture. Depreciation recapture is a tax on the depreciation deductions you claimed over the years you owned the property — the IRS essentially takes back a portion of those deductions when you sell. Depreciation recapture on real estate is taxed at a maximum rate of 25%, which is higher than the 0% to 20% long-term capital gains rates that apply to the rest of your profit. Capital gains tax applies to the portion of your gain above your original purchase price (adjusted for improvements), while depreciation recapture applies to the portion of your gain that's attributable to depreciation deductions you took. Understanding both helps explain why the tax bill on selling a rental property is often higher than sellers expect.