Two types of recapture from cost seg
A standard rental sale only has Section 1250 recapture (capped at 25%). A cost segregation study reclassifies some components as personal property (Section 1245). When you sell, the Section 1245 recapture on those components is taxed at ordinary income rates with no 25% cap, in addition to the Section 1250 recapture on the remaining real property.
How the numbers stack
Example: $40,000 in Section 1250 recapture plus $20,000 in Section 1245 recapture from cost-seg'd components. The $40,000 is capped at 25% = $10,000. The $20,000 at a 32% ordinary rate = $6,400. Without cost seg, all $60,000 might have been Section 1250 at 25% = $15,000. The difference is $1,400 — not large, but it illustrates the rate premium on Section 1245 components.
Still worth it for most investors
Despite the higher eventual recapture rate on 1245 components, the time value of taking large deductions years earlier usually outweighs the rate difference. A 1031 exchange can defer both types of recapture indefinitely. Use the cost segregation calculator to model whether early deductions justify the trade-off.
Frequently asked questions
Does cost segregation increase recapture at sale?
Yes — and some of it may be Section 1245 recapture at ordinary income rates rather than the 25% Section 1250 cap.
Can a 1031 exchange defer cost-seg recapture?
Yes — a valid 1031 defers all gain recognition, including both Section 1245 and 1250 recapture.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.