Depreciation Recapture Explained

Depreciation recapture is the portion of taxable gain attributable to depreciation deductions previously claimed on an investment property. Under Internal Revenue Code Section 1250, when real property is sold at a gain, the depreciation claimed during the holding period is generally recaptured and taxed at a maximum federal rate of twenty five percent, which is typically higher than the standard long term capital gains rate applied to the remaining appreciation. This means that a Columbus, OH investor selling a rental property held for many years often faces a blended tax rate on the sale, combining the twenty five percent recapture rate on the depreciation portion with the applicable capital gains rate on the balance of the gain.

Depreciation recapture applies whether the investor wants it to or not, because the deductions were already taken to reduce taxable income during the years the property was held. The only broadly available way to defer depreciation recapture on real property is a like kind exchange under Section 1031, which defers both the capital gains and the recapture amount as long as the exchange is properly structured through a Qualified Intermediary and the replacement property is like kind real property held for investment or business use. Columbus, OH investors who have owned rental housing, office buildings, or industrial property for a decade or more frequently discover that depreciation recapture is a larger share of their tax bill than they anticipated, which is one of the most common reasons investors explore a one thousand thirty one exchange before listing a long held property.