Depreciation recapture is a tax provision that requires you to pay taxes on the depreciation deductions you claimed on a rental property when you sell it.
When you own a rental property, the IRS allows you to deduct a portion of the property's value each year as depreciation. This reduces your taxable rental income. However, when you sell the property, the IRS "recaptures" that benefit by taxing the total amount of depreciation you claimed at a special rate — currently up to 25%.
Example: If you claimed $50,000 in depreciation over the years and sell the property, up to $50,000 of your gain could be taxed at the 25% recapture rate rather than the lower long-term capital gains rate.
Depreciation recapture only applies to the portion of your gain attributable to depreciation. Any remaining gain above your adjusted basis is taxed as a capital gain.
Key point for landlords: Even if you didn't claim depreciation on your tax returns, the IRS treats it as if you did. This is called "allowed or allowable" depreciation — you owe recapture whether or not you actually took the deduction.