Insights

What Depreciation Recapture Means When a Property Sells

Last updated November 9, 2026 · By the XSITE Capital Investment Team

The Vue at St. Andrews, an apartment community in Columbia, South Carolina

Key facts
What it is	The part of taxable gain at sale that comes from depreciation deducted during the hold.
What it is not	It is not the cash you receive at closing, and it is not a separate bill on top of the sale price.
Who it applies to	Owners and partners who took depreciation on real property and then sell, or whose partnership sells.
Where it is decided	IRS Topic 409 for unrecaptured section 1250 gain, and Schedule K-1 (Form 1065) in a partnership sale year.
Main misconception	Selling for the same price you paid means there is no taxable gain. Depreciation can create gain even then.
Where to go next	The short answer on the FAQ, then your CPA.

Depreciation recapture is the part of a property's taxable gain at sale that comes from depreciation deducted during the hold. For an apartment building, the gain tied to straight-line depreciation on the structure is generally unrecaptured section 1250 gain, taxed at a federal maximum of 25 percent, while depreciation on shorter-life components from a cost segregation study can be recaptured at ordinary income rates. The cash you receive at sale is a different number, set by the loan payoff and the waterfall.

What is depreciation recapture?

Depreciation recapture is the tax characterization of gain that exists because depreciation reduced your basis. What depreciation recapture means when a property sells is that part of the profit is not all taxed as long-term capital gain.

Basis starts at cost and falls as depreciation is taken. Amount realized is the sale price, with adjustments the form instructions describe. Gain is the excess of amount realized over adjusted basis. If you depreciated $20, basis is $20 lower, and gain is $20 higher than it would have been with no depreciation.

That arithmetic is why a sale at the original price can still produce taxable gain. The next table splits that gain into the slices the federal rules use. Your CPA applies the slices. This article does not compute a bill.

How is gain taxed when an apartment property sells?

Gain on a sold apartment property is generally split into unrecaptured section 1250 gain, any ordinary recapture on shorter-life components, remaining long-term capital gain, and possibly the net investment income tax. Each slice has its own federal treatment.

General federal rules. Your CPA applies them. State tax is extra and is not listed as a rate.
Slice of gain	Where it comes from	Federal treatment	Source
Unrecaptured section 1250 gain	Straight-line depreciation taken on the building	Taxed at a maximum rate of 25 percent	IRS Topic 409
Section 1245 recapture	Depreciation on shorter-life personal property, often from a cost segregation study	Recharacterized as ordinary income to the extent of the depreciation	The cost segregation report and your CPA
Remaining long-term capital gain	Gain above the depreciation already accounted for, held longer than one year	0, 15 or 20 percent, depending on taxable income	IRS Topic 409
Net investment income tax	The lesser of net investment income or the amount your modified adjusted gross income exceeds the threshold	3.8 percent. Thresholds are $200,000 single and $250,000 married filing jointly. Rental income and capital gain can be included	IRS net investment income tax page
State income tax	The same sale, under state law	Varies by state. Some states start from federal income and then modify it	That state's instructions

IRS Topic 409 is the source for the 25 percent maximum on unrecaptured section 1250 gain and for the 0, 15 and 20 percent long-term rates: irs.gov/taxtopics/tc409. The 3.8 percent net investment income tax, and the $200,000 and $250,000 thresholds, are on the IRS net investment income tax page. Residential rental property is depreciated over 27.5 years under the general depreciation system, which Publication 527 states.

What does a same-price sale look like after depreciation?

A sale at the original price can still produce taxable gain equal to the depreciation taken, because basis fell during the hold. The example uses $100 and $20 so the relationship is obvious.

Illustrative only, not an XSITE Capital offering, property or forecast

Illustrative only, not an XSITE Capital offering, property or forecast. Round dollars. Ignores selling costs, loan payoff and the waterfall.
Line	Sale at $100	Sale at $130
Purchase price	$100	$100
Depreciation taken	$20	$20
Adjusted basis	$80	$80
Sale price	$100	$130
Taxable gain	$20	$50
Of which, tied to depreciation	$20	$20
Remaining gain	$0	$30

At a $100 sale, the entire $20 of gain is tied to depreciation. At a $130 sale, $20 of the $50 gain is tied to depreciation and $30 is remaining gain. Neither column is cash to a partner. The loan payoff, selling costs and the waterfall all come before a wire.

A limited partner's share of the gain is the amount on that partner's K-1, not a homemade fraction of the building. Box 9c is the usual place for unrecaptured section 1250 gain. Read it with the statements, using how to read a real estate K-1.

Sale-year tax character is a question for your CPA. The team can only point to the K-1 lines the partnership issued.

Talk to the team Call (301) 900-2625

How do cost segregation and bonus depreciation change the sale-year bill?

Cost segregation and bonus depreciation move deductions into earlier years, and they can change how much of the sale-year gain is taxed at ordinary rates rather than as unrecaptured section 1250 gain. The deduction during the hold and the character at sale are one decision seen at two times.

The IRS has said that the One, Big, Beautiful Bill, Public Law 119-21, made 100 percent additional first-year depreciation permanent for qualified property acquired after January 19, 2025, and that an elective 40 percent rate is available for the first tax year ending after that date. Qualified property is a defined term. A building's structural residential rental component is generally not bonus-eligible.

Shorter-life property identified in a cost segregation study may be. Your CPA decides what was acquired when, and what the election does on the return. The IRS write-up is the guidance on additional first-year depreciation.

Taking a larger deduction now can mean a larger ordinary-income slice later. That is not a reason to skip the study, and it is not a reason to commission one. It is a reason to ask the question before the return for the purchase year is filed.

Do suspended passive losses help in the sale year?

Suspended passive losses generally become available in the year you dispose of your entire interest in the activity in a taxable transaction to an unrelated party. Publication 925 is the source for that release, and it has exceptions your CPA has to test.

A sale of the building by the partnership is not automatically a disposition of your partnership interest. If you still hold the interest, the release rule may not apply to you even though the building was sold. Ask your CPA which event happened: a sale of assets inside the partnership, or a sale of your interest.

Suspended losses that are released can offset income, including gain from the sale. They do not erase recapture as a category. They are a separate computation that may absorb income the sale created. The passive-activity test itself is explained in the K-1 guide and in Publication 925.

Can recapture be deferred?

Recapture can be deferred in a like-kind exchange of real property that meets section 1031, and an installment sale can spread recognition of some gain. A refinance does not defer recapture, because a refinance does not recognize it in the first place.

Illustrative comparison of three events. The partnership agreement decides who chooses and who receives cash.
	Sale	Refinance	1031 exchange of the property
Does it trigger gain	Yes, if amount realized exceeds adjusted basis	Not by itself	Gain is deferred only if the section 1031 rules are met
Cash to a limited partner	Whatever the waterfall distributes after the loan and costs	Whatever the agreement distributes from loan proceeds	Often little or none, because the property is replaced
Who decides	The sponsor, within the agreement	The sponsor and the lender	The sponsor, if the partnership owns the property. A partner cannot 1031 a partnership interest
Effect on recapture	Recognized in the sale year, in the slices above	No recapture solely from the new loan	Deferred to the extent the exchange qualifies. It is not erased

The IRS has said like-kind exchanges are limited to real property. That announcement is Like-kind exchanges now limited to real property. A partnership interest is personal property for this purpose. The question of whether a partnership interest can be used in a 1031 exchange is answered on real estate investing for business owners, which owns that question.

An installment sale is a sale where at least one payment arrives after the tax year of the sale. Depreciation recapture is often recognized in the year of sale even when other gain is installment-method gain. That distinction is exactly the sort of line your CPA should confirm before a contract is signed.

What should you bring your CPA in the sale year?

Bring your CPA the sale documents and the depreciation history, not a single closing statement. The character of the gain is in the history.

The purchase closing statement and the depreciation schedules from every year of the hold, including any cost segregation report.
The sale contract, the settlement statement and the loan payoff.
The draft or final K-1, with statements, and the prior-year K-1 so suspended losses have a trail.
Any 1031 exchange documents, if the partnership pursued one.
Your question, in writing, about how much of the gain is unrecaptured section 1250 gain.

Where XSITE fits, and what it is not

XSITE Capital does not calculate a reader’s tax, and this article does not decide whether a property is exchanged or sold. A completed sale is described on The Vue at St. Andrews. That page is the property record, not a tax example.

Whether a partnership interest can be exchanged is answered on real estate investing for business owners. Planning, as distinct from this sale-year character, is on tax filing versus tax planning.

Targeted returns are estimates, not guarantees. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Offerings are available to accredited investors only. General education, not tax, legal or investment advice. Tax rules change.

Questions

Questions about depreciation recapture

What tax rate applies to depreciation recapture on rental property?

For an apartment building depreciated on a straight line, the gain tied to that depreciation is generally unrecaptured section 1250 gain, taxed at a federal maximum of 25 percent. Depreciation on shorter-life parts identified in a cost segregation study can be recaptured at ordinary income rates. Any remaining long-term capital gain is taxed at 0, 15 or 20 percent. The 3.8 percent net investment income tax can apply on top. Your CPA applies the rates to your return. State tax is separate.

Is depreciation recapture avoidable?

Recapture is not a penalty you can decline after you have taken the deduction. A like-kind exchange under section 1031 can defer gain, including the depreciation-related portion, when the rules are met, and it is limited to real property. Death can change the basis for heirs under separate rules. Neither path is available just because a sale would be inconvenient, and neither one is tax advice for a specific property.

Does a cost segregation study increase depreciation recapture?

A cost segregation study usually increases depreciation during the hold by assigning parts of the building to shorter lives, and those parts can be recaptured at ordinary rates when the property is sold. The study does not create a second tax on the same dollar of cash. It changes the character and the timing of deductions you already chose to take. Your CPA compares the extra deductions during the hold with the sale-year character of the gain.

Does a refinance trigger depreciation recapture?

A refinance does not sell the property, so it does not, by itself, trigger depreciation recapture. You still own the building, and the adjusted basis does not change merely because the loan changed. Cash from a refinance can be distributed, and that distribution can reduce basis. Recapture is a sale question. A refinance is a debt question, until someone actually sells.

Will the K-1 show my share of recapture in the sale year?

In a sale year, Box 9c of Schedule K-1 (Form 1065) and the attached statements generally report unrecaptured section 1250 gain, along with other sale items the instructions name. The face of the form is not the whole story. Give your CPA the statements. How those boxes fit the rest of the K-1 is covered in the K-1 guide.

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