Most landlords estimate the tax on a rental sale the same way: take the gain, multiply by 15 or 20 percent, done. The real number is usually higher, sometimes by a lot, and the surprise lands at filing, long after the proceeds have been spent or reinvested.

The gap has a name: depreciation recapture.

Why the bill is higher than the estimate

Every year you owned the rental, you deducted depreciation against your income. That was a real benefit. At sale, the IRS takes part of it back. The portion of your gain equal to the depreciation you claimed is unrecaptured Section 1250 gain, and it is taxed at a maximum 25 percent, not the 15 or 20 percent long-term rate that applies to the rest. For a high earner, that 25 percent cap is usually the binding rate.

Here is the part that catches people: recapture applies to depreciation allowed or allowable. Skipping depreciation does not avoid recapture. It just wastes the deduction and leaves you with the same bill. The IRS treats it as taken whether you took it or not.

One sale, three layers

Take an Arlington landlord who bought a rental years ago, claimed $120,000 of depreciation over the hold, and sells at a $300,000 total gain. The tax is not one rate applied once. It stacks:

• $120,000 of unrecaptured Section 1250 gain, taxed at up to 25 percent
• $180,000 of remaining gain, at the 15 or 20 percent long-term rate depending on income
• The 3.8 percent net investment income tax, which can layer on top once income crosses $250,000 joint or $200,000 single

Three layers on a single transaction. The back-of-envelope 15 percent estimate can understate the bill by tens of thousands. For more on that third layer, see our piece on the net investment income tax.

A note on land and cost segregation

Only the building depreciates, not the land, so only the building portion drives recapture. This is also why cost segregation, which front-loads depreciation to accelerate deductions, raises the recapture question later. More deduction now means more to recapture at sale. That can still be the right move, but it is a timing trade, not free money.

What you can do, before the sale

The planning window is before you sell, ideally before you list. After closing, the result is usually locked.

• Section 1031 exchange. Defer the entire gain, recapture included, by reinvesting in other real property within the strict timing rules: 45 days to identify, 180 days to close.
• Installment sale. Spread the gain across multiple years to manage the rate and the income spike.
• Sale-year timing. Moving a sale into a lower-income year can change the capital gains layer, though the 25 percent recapture cap often holds regardless.

Which of these fits depends on your goals and your numbers. This is the kind of decision our real estate investor strategy work and the broader tax planning for high-income earners approach are designed to catch in advance.

Want this reviewed against your own numbers? Schedule a discovery call at intake.simonsgroup.net to start a focused conversation.

Frequently asked questions

How is depreciation recapture taxed?

The portion of gain equal to depreciation claimed on real property is unrecaptured Section 1250 gain, taxed at a maximum 25 percent. The actual rate is the lesser of your marginal ordinary rate or 25 percent, and for high earners the 25 percent cap usually applies.

Can I avoid recapture by not claiming depreciation?

No. Recapture applies to depreciation allowed or allowable, meaning the IRS treats it as taken whether you claimed it or not. Skipping it forfeits the deduction without avoiding the tax.

Can a 1031 exchange defer recapture?

Yes, in most cases. A like-kind exchange into other real property can defer the entire gain, including recapture, if you meet the identification and closing deadlines.