Depreciation recapture on a short-term rental
Quick answer
Depreciation recapture is the tax you pay back on depreciation when you sell a rental. Building depreciation is taxed at your ordinary rate, capped at 25%. Short-life parts from a cost segregation study, like appliances and furniture, are taxed at full ordinary rates up to 37%. The STR loophole defers tax. It does not erase it.
On this page
- What is depreciation recapture?
- What rates apply to recapture in 2026?
- What does recapture cost on a real sale? A worked example
- How can I lower or delay the recapture bill?
- Is the STR loophole still worth it with recapture? A checklist
- What do our wealth plans show about recapture?
- Frequently asked questions
- Sources
What is depreciation recapture?
Depreciation gives you a deduction each year for wear on the building and its parts. It also lowers your basis in the property by the same amount. Basis is what you subtract from the sale price to find your gain. So every dollar of depreciation you take is a dollar of extra gain when you sell.
At the sale, the IRS splits that gain into pieces. The piece that matches the depreciation you took is recapture. It never gets the low long-term capital gain rate in full.
One detail catches people. The rules use depreciation "allowed or allowable." If you owned a rental and never claimed depreciation, your basis still goes down. Skipping it does not avoid the bill.
What rates apply to recapture in 2026?
| Piece of the gain | What it comes from | 2026 federal rate |
|---|---|---|
| Section 1245 recapture | Depreciation on personal property a cost segregation study moved into 5 and 7-year lives: appliances, carpet, cabinets, furniture | Your ordinary rate, up to 37% |
| Unrecaptured Section 1250 gain | Straight-line depreciation on the 27.5-year building | Your ordinary rate, capped at 25% |
| Long-term capital gain | The rise in value above your original basis | 0%, 15% or 20%. For 2026 the 15% rate runs to $613,700 of taxable income on a joint return ($545,500 single). |
| Net investment income tax | Can apply on top if the gain is investment income to you | 3.8% above $250,000 of income joint ($200,000 single) |
Land improvements such as driveways, fences and landscaping sit in a 15-year class and follow their own split. Ask the firm that did your cost segregation study for the class of every line item before you sell, not after.
In short
You deduct at your ordinary rate today and pay back at a mix of 25% and ordinary rates on the day you sell. The win is the gap in rates plus the years you keep the money.
What does recapture cost on a real sale? A worked example
These are assumptions. Each one changes the answer. Federal tax only, no state tax, no net investment income tax.
| Purchase | $650,000 in July 2026, land $130,000 |
| Cost segregation split | $104,000 of 5-year personal property, $416,000 of 27.5-year building |
| Bonus depreciation | 100% on the 5-year property in 2026 |
| Ordinary rate | 32% in the purchase year and the sale year |
| Sale | June 2032 for $760,000, with 6% selling costs ($45,600) |
Depreciation taken. $104,000 on the 5-year property in year one, plus $89,503 on the building over about six years (mid-month convention). Total: $193,503. At 32%, those deductions saved $61,921, most of it in year one if the STR loophole or REPS let the loss offset other income.
Gain on sale. Amount realized $714,400, minus adjusted basis $456,497 ($650,000 less $193,503), gives a total gain of $257,903.
| Piece of the gain | Amount | Rate | Tax |
|---|---|---|---|
| Section 1245 recapture, 5-year property | $104,000 | 32% | $33,280 |
| Unrecaptured Section 1250 gain, building | $89,503 | 25% | $22,376 |
| Long-term capital gain on the rest | $64,400 | 15% | $9,660 |
| Total federal tax on the sale | $257,903 | $65,316 |
Of the $65,316, $55,656 is caused by depreciation. The $9,660 would have been owed anyway because the price went up.
| Tax saved by depreciation, 2026 to 2032 | $61,921 |
| Tax paid back on depreciation at sale | ($55,656) |
| Permanent difference | $6,265, plus six years of use of the money |
| Same sale if the sale-year rate is 37% | Section 1245 piece rises to $38,480. Permanent difference falls to $1,065. |
This is the cautious case. It assumes all $104,000 of short-life depreciation comes back as ordinary income. If the sale contract gives the furniture and fixtures a low value, part of that can be taxed at lower rates instead. Your CPA sets that split.
So the strategy did not create $62,000 of savings. It created about $6,000 of permanent difference and years of use of the cash. That is still a good trade for many owners. It is not the number you see on social media. Run your own sale in the depreciation recapture calculator.
How can I lower or delay the recapture bill?
- Do not sell. Recapture only happens on a sale or other taxable disposition. A refinance or a cash-out loan is not a sale.
- Use a 1031 exchange. A like-kind exchange rolls the gain and the recapture into the next property. You need a qualified intermediary before closing, a replacement named within 45 days, and the purchase closed within 180 days. Since 2018 it covers real property only, so the personal property from a cost segregation study may not roll over. Any cash or debt relief you take out is taxed, with recapture first.
- Hold until death. Under Section 1014, heirs take the property at its value on the date of death. The depreciation history goes away with the built-in gain. This is current law and also the part of a plan most exposed to a future law change.
- Offset income in the sale year. Ordinary recapture is ordinary income, so ordinary losses offset it. A common move is to buy another property that year and run a cost segregation study on it. Suspended passive losses on the property you sell are released when you sell it in a taxable sale to an unrelated buyer.
What does not work well: stock losses only offset the capital gain piece, plus $3,000 a year of other income. An installment sale does not spread the Section 1245 recapture. Section 453(i) makes it taxable in the year of sale, even if the cash comes in over many years. A home you later live in does not shelter the depreciation either. The home sale exclusion does not cover depreciation taken after May 6, 1997.
Is the STR loophole still worth it with recapture? A checklist
It tends to be worth it when these are true:
- Your rate today is high and you expect it to be the same or lower when you sell.
- You plan to hold for five years or more, so the deferral has time to be worth something.
- You plan to exchange under Section 1031 or hold for life.
- The cash from the year-one refund goes into something that earns a return.
- You can meet a material participation test, so the loss is usable this year.
Who it does not fit:
- Owners who plan to sell within two or three years. The deferral is too short.
- Earners whose income is rising fast, so the sale-year rate is likely higher.
- Owners who cannot meet the participation tests. The loss is suspended anyway.
- Anyone buying only for the deduction. A weak property with a strong tax result still loses money.
What do our wealth plans show about recapture?
Of the 61 anonymized wealth plans published on this site (inventory dated Sept 13, 2026), 34 discuss cost segregation, and only 6 mention depreciation recapture. That gap is the point of this page. The first-year number gets the attention. The sale year gets planned late, if at all.
One published plan, Henri and Melica's, uses cost segregation and notes that charitable giving can offset a high-income year with large recapture. That is the kind of sale-year planning that keeps more of the benefit.
Frequently asked questions
What is the depreciation recapture rate in 2026?
There are two. Straight-line depreciation on the building is unrecaptured Section 1250 gain, taxed at your ordinary rate but capped at 25%. Depreciation on Section 1245 personal property, such as the 5 and 7-year parts from a cost segregation study, is taxed at your full ordinary rate, up to 37%. The 3.8% net investment income tax can apply on top.
Does recapture cancel out the short-term rental loophole?
Usually not, but it takes a real bite. You deduct at your ordinary rate now and pay back at a mix of 25% and ordinary rates later. If your rate is the same in both years, the gain is the rate gap plus the years you keep the money. If your rate is higher in the sale year, you can end up close to even.
Can a 1031 exchange avoid depreciation recapture?
It defers it. A like-kind exchange rolls the gain and recapture into the next property by carrying over the low basis. Since 2018 it covers real property only, so personal property from a cost segregation study may not roll over. Any cash or debt relief you take is taxed, with recapture first.
Does an installment sale spread out recapture?
Not the Section 1245 part. Section 453(i) makes recapture income taxable in the year of sale, even if you are paid over several years. You can owe tax before the cash arrives. Ask your CPA how the rest of the gain is reported as payments come in.
What happens to recapture when the owner dies?
Under Section 1014, heirs take the property at its fair market value on the date of death. The old basis and the depreciation history go away. This is current law, and it is also the part of a plan most exposed to a future law change.
Do I owe recapture if I never claimed depreciation?
Yes. The rules use depreciation allowed or allowable. Your basis goes down whether or not you took the deduction. If you missed depreciation in past years, a CPA can often catch it up with Form 3115 instead of amending each year.
How do I find out how much depreciation I have taken?
Look at Form 4562 and the depreciation schedule in each year of your tax returns. Add the amounts for the property across every year you owned it. The sale itself is reported on Form 4797.
Sources
- IRS Publication 544, Sales and Other Dispositions of Assets
- IRS Publication 527, Residential Rental Property
- IRS, Topic 409: Capital gains and losses
- IRS, Rev. Proc. 2025-32 (2026 capital gain brackets)
- IRS, Net investment income tax
- IRS, Like-kind exchanges: real estate tax tips
- IRC Section 453 (installment method, 453(i) recapture)
- IRS, guidance on 100% bonus depreciation after OBBBA
Who wrote this
Written by Preston Seo, founder of Legacy Investing Show. Preston has owned rental property since 2018, starting with a fourplex, and teaches real estate tax strategy to W-2 earners and investors. He is not a CPA or attorney. This page was last reviewed in October 2026 against the IRS sources above. It is education, not tax advice. Have a CPA model your own sale before you list the property.
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Educational content only. It is not individual tax, legal, or investment advice. Confirm your own facts with a qualified tax professional before you file.