The setup
Suppose you buy a residential rental for $320,000. The county assessor's statement shows land at 20% of total value ($64,000) and the building at 80% ($256,000). Land is never depreciable. Annual MACRS depreciation = $256,000 ÷ 27.5 = $9,309 per year.
Deductions over time
Over 10 years you accumulate $93,090 in total depreciation. In a 24% federal bracket, the annual deduction saves roughly $2,234 in taxes — about $22,340 over the decade. This is a non-cash deduction; the property's market value can grow while depreciation reduces taxable income each year.
Recapture at sale
Sell after 10 years for $450,000. Adjusted basis = $320,000 − $93,090 = $226,910. Total gain = $450,000 − $226,910 = $223,090. Recapture slice: $93,090 taxed at up to 25% = up to $23,273. Remaining $130,000 long-term capital gain at 15% = $19,500. Estimated federal tax: roughly $42,773, before state and any NIIT. Use the calculators below to run your own numbers.
Frequently asked questions
How much tax does depreciation recapture actually cost?
At the 25% federal cap, each dollar of depreciation claimed generates up to 25 cents in future recapture — while the deduction saved you your marginal rate each year. The net benefit is positive if your marginal rate exceeds 25%.
Is the recapture based on the selling price?
No — recapture is based on depreciation claimed, not the sale price. It equals the lesser of accumulated depreciation or the total gain.
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.