Two sides of the same deduction
The depreciation deduction is the annual write-off you take while you own a rental — a portion of the building's cost deducted each year against your rental income. Depreciation recapture is what happens to those deductions when you sell: the IRS taxes the part of your gain attributable to the depreciation you claimed. They are not two separate taxes so much as the setup and the settlement of the same tax benefit.
Each year, depreciation reduces both your taxable income and your adjusted basis in the property. A lower basis means a larger taxable gain at sale, and the portion of that gain equal to the depreciation you took is 'recaptured' when you dispose of the property.
How each is taxed
The deduction offsets ordinary income at your marginal rate. If you are in the 32% bracket, every $1,000 of depreciation saves roughly $320 in tax that year — and because it is a non-cash deduction, you get the savings without spending anything.
The recapture on real property is 'unrecaptured Section 1250 gain,' taxed at your ordinary rate but capped at a maximum of 25%. Because the deduction often saves tax at a rate above 25% while recapture is capped at 25%, many investors come out ahead on the rate difference alone — on top of the time-value benefit of having deferred the tax for years.
Why you should always take the deduction
A common mistake is skipping depreciation in the hope of avoiding recapture later. That does not work: the IRS computes recapture on depreciation 'allowed or allowable' — meaning you owe recapture on what you could have deducted, whether or not you actually claimed it. Skipping the deduction throws away the annual tax savings while leaving the recapture bill intact.
If you missed depreciation in prior years, you can generally correct it and claim the catch-up using Form 3115 rather than amending each old return. And the recapture itself is deferrable with a 1031 exchange, or can be eliminated entirely by the step-up in basis your heirs receive if you hold the property until death.
Frequently asked questions
Is depreciation recapture just paying back the deduction?
Roughly, but not dollar-for-dollar. The deduction saves tax at your ordinary marginal rate each year; recapture on real property is capped at 25%. If your marginal rate is above 25%, you keep the difference, plus the value of deferring the tax for years.
Should I skip depreciation to avoid recapture?
No. Recapture is based on depreciation 'allowed or allowable,' so you owe it even if you never claimed the deduction. Skipping depreciation forfeits the yearly savings for no benefit.
Can I avoid recapture after taking the deduction?
You can defer it with a 1031 exchange, or eliminate it through the step-up in basis your heirs receive if you hold the property until death.
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.