What Is Depreciation Recapture?

Depreciation recapture is the mechanism by which the IRS "takes back" some of the tax savings you received from depreciation deductions when you sell a business or investment asset for more than its depreciated book value. When you sell depreciable business property (other than real estate), the gain attributable to past depreciation deductions is taxed as ordinary income rather than at the lower capital gains rate — this is called Section 1245 recapture. For real estate, the recapture is called Section 1250 recapture (or "unrecaptured Section 1250 gain") and is taxed at a maximum federal rate of 25% rather than your ordinary income rate. Depreciation recapture is one of the most significant and often overlooked taxes in real estate investing — landlords who have claimed decades of depreciation can face large recapture bills when they sell. Strategies like 1031 exchanges can defer both capital gains tax and depreciation recapture.