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USA Tax Glossary
Depreciation recapture rules can cause part of the gain on sale of depreciated property to be taxed differently because depreciation deductions were allowed or allowable before sale.
Investor Context
For rental real estate, investors often hear about Section 1250 property and unrecaptured Section 1250 gain. IRS guidance notes that gain attributable to depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate.
Why It Matters
Depreciation reduces basis and can affect gain on sale.
Accelerated depreciation and component depreciation can create future recapture considerations.
Sale planning should review depreciation schedules before estimating after-tax proceeds.
Records To Prepare
Original closing statement
All depreciation schedules
Improvement records and cost segregation reports
Sale closing statement and selling expense detail
Common Caution
A property sale estimate that ignores depreciation recapture or unrecaptured Section 1250 gain can understate the potential federal tax cost.
Direct Answers
No. Gain calculations often consider depreciation allowed or allowable, so missing prior depreciation needs professional review.
No. Gain may include different components, including capital gain, Section 1250 considerations, and other recapture depending on the property and depreciation history.
Official IRS Reference
IRS: Depreciation and recapture FAQRelated Terms
Depreciation is the annual deduction that lets a taxpayer recover the cost or other basis of business or income-producing property over a number of years.
Bonus depreciation is an additional first-year depreciation deduction for eligible property.
A 1031 exchange, also called a like-kind exchange, can allow gain deferral when business or investment real property is exchanged for other like-kind business or investment real property.
