Glossary

Depreciation Recapture

The portion of gain on sale attributable to prior depreciation deductions that is taxed separately from the remaining capital gain, effectively 'recapturing' the tax benefit the depreciation previously provided.

For real property (Section 1250 property), because MACRS real estate depreciation is already straight-line, most recapture is taxed not at ordinary income rates but as 'unrecaptured Section 1250 gain,' capped at a 25% federal rate — still higher than the top long-term capital gains rate. Personal property and land improvements reclassified through cost segregation (Section 1245 property) are subject to full recapture at ordinary income rates, which can exceed the 25% real property rate for high-bracket taxpayers, meaning the more aggressive a cost segregation study, the larger the ordinary-rate recapture exposure at a taxable sale. Recapture is triggered by a sale or other taxable disposition but can be deferred, not eliminated, through a 1031 exchange, which is one of the principal tax-planning reasons investors who have taken significant accelerated depreciation are especially motivated to exchange rather than sell outright.