Depreciation recapture is the tax owed on the portion of a property's sale gain that comes from depreciation deductions claimed - or eligible to be claimed - during ownership. It's a separate calculation from ordinary capital gains, with its own rate, and it applies to rental and commercial property owners regardless of whether they actually filed for the depreciation deduction every year they were entitled to it.
Why It Exists in the First Place
Depreciation lets an owner deduct a portion of a property's value against taxable income each year, on the theory that the building is wearing out over time. That deduction lowers taxes during ownership, but it also lowers the property's basis - and a lower basis means a larger taxable gain when the property eventually sells. Recapture is essentially the IRS collecting back some of the benefit the owner received earlier, taxed at a rate specific to real property rather than the general capital gains rate.
The Rate and How It's Calculated
For real property, recapture is taxed at a maximum federal rate of 25%, applied to the lesser of the total gain or the accumulated depreciation, whichever is smaller. Any remaining gain above the recapture amount is taxed at standard long-term capital gains rates. An investor who claimed $80,000 of depreciation on a Tampa commercial building over a twelve-year hold, then sold with a total gain of $200,000, would owe recapture tax on the $80,000 first, with the remaining $120,000 taxed at ordinary capital gains rates.
"Allowed or Allowable" Catches Owners Who Skipped It
The IRS calculates recapture using depreciation that was allowed or allowable, meaning the full amount the owner was legally entitled to deduct each year, whether or not it was actually claimed on the return. An owner who never claimed depreciation to keep their return simple still owes recapture as though they had, which is a common and expensive surprise. The fix, if caught in time, is generally a Form 3115 change of accounting method filed before the sale, which lets an owner claim missed depreciation retroactively rather than losing the deduction while still owing the recapture tax on it.
Deferring Recapture Alongside Capital Gains
A properly structured 1031 exchange defers depreciation recapture along with the underlying capital gain, rolling both into the replacement property's basis rather than triggering either at the sale. This is one of the more valuable and less understood parts of an exchange - investors sometimes focus entirely on deferring the capital gains piece and don't realize the recapture liability, which can be a large chunk of the total tax bill on a long-held property, gets deferred right along with it. There isn't a way to defer only the recapture piece while cashing out the capital gains portion; the exchange has to cover the full transaction to defer both.
State Taxes and the Florida Advantage
Recapture is a federal calculation, and Florida's lack of a state income tax means there's no additional layer on top of it for property sold here, unlike a sale in a state with its own capital gains and recapture treatment. An out-of-state seller moving proceeds into a Tampa replacement property sometimes assumes the federal recapture number is the whole story precisely because Florida doesn't add anything to it - which is accurate for the property itself, though the seller's home state may still tax the recapture as a resident even if the underlying property is elsewhere.
Common 1031 Exchange Questions
Does depreciation recapture apply to your primary residence?
Generally not, since a primary residence used purely for personal purposes doesn't generate depreciation deductions. Recapture only applies to property used for rental, business, or investment purposes where depreciation was allowed or allowable.
Is recapture calculated before or after the Section 121 exclusion on a mixed-use property?
Recapture on the rental-use portion of a property is generally still owed even when a portion of the overall gain qualifies for the primary residence exclusion, since the exclusion doesn't extend to depreciation taken during rental periods.
What's the difference between recapture on land and recapture on the building?
Land isn't depreciable, so there's no recapture attributable to land value. Recapture applies only to the building and any other depreciable improvements, which is why an accurate original allocation between land and building value matters at sale time.
Can you avoid recapture tax by selling at a loss?
If the sale price is below adjusted basis, there's no gain to recapture, so no recapture tax is owed, though the loss itself has its own separate tax treatment depending on how the property was used.
Does a 1031 exchange defer 100% of the recapture, or just part of it?
A fully qualifying exchange, with equal or greater value and equal or greater debt on the replacement side, generally defers the entire recapture liability along with the capital gain. A partial exchange that pulls out cash or reduces debt can trigger some recognized gain, including a recapture portion, up to the amount of that boot.
