Depreciation recapture

Rental property is depreciated on a 27.5-year schedule (residential) or 39-year schedule (commercial). Those annual deductions reduce taxable income while you hold. When you sell, the IRS "recaptures" the cumulative depreciation at up to 25% federal.

Example

Take $10,000 of depreciation per year for 10 years = $100,000 recaptured at sale. Max federal tax: $25,000 — separate from capital-gains tax on appreciation.

How to manage it

• 1031 exchange defers both gain and recapture.
• Step-up at death eliminates both for heirs.
• Passive loss offsets may reduce the bite for some investors.

Always plan exit tax before listing — a CPA can model whether 1031, opportunity zone, or straight sale is best.