Depreciation Recapture
Depreciation recapture is the portion of gain on the sale of depreciable property that must be taxed at ordinary income rates (for Section 1245 property) or at up to 25% (for Section 1250 real property) to recover previously deducted depreciation.
What it means
When depreciable real property is sold for a gain, the portion of gain attributable to prior depreciation deductions is 'recaptured' at specified rates rather than the lower long-term capital gain rate. For real property (Section 1250), the recapture portion — called unrecaptured Section 1250 gain — is taxed at a federal maximum of 25%. For personal property (Section 1245), recapture is taxed at ordinary income rates.
A 1031 exchange defers both capital gain and depreciation recapture. Cost segregation studies accelerate depreciation but also accelerate recapture exposure if the property is sold without a 1031 — more of the eventual sale will face Section 1245 ordinary-income recapture on the reclassified components.
Related terms
Keep reading