Depreciation Recapture When Selling a Rental: Your Real Basis Is Lower Than You Think
The basis illusion: what you think you paid vs what the IRS counts
Ask a rental owner for their basis and most give the same answer: what they paid, plus what they put into the place. That number is a starting point, not your basis. The tax code requires you to subtract every dollar of depreciation that was allowed or allowable on the building and improvements (IRC 1016(a)(2)). Land is never depreciated, so it is the floor.
Residential rentals are depreciated straight-line over 27.5 years, commercial buildings over 39 (IRC 168(c)). Keep a rental 20 years and roughly three quarters of the building is written off. The deductions felt like free money each April. At the sale they come back.
How depreciation recapture is taxed when you sell a rental
The gain on a rental sale is taxed in layers. The part equal to the depreciation on the building is unrecaptured Section 1250 gain, taxed at your ordinary rate but capped at 25% federal (IRC 1(h)(6)). The rest is long-term capital gain at 0%, 15% or 20%.
On top of both comes the 3.8% net investment income tax for most landlords (IRC 1411) and your state's tax; California taxes all of it as ordinary income.
Appliances, carpet and anything you split out with a cost segregation study are different: that depreciation is Section 1245 recapture, taxed at ordinary rates up to 37%, and it is due in the year of sale even on an installment sale (IRC 453(i)). Rates, examples and forms are on the depreciation recapture page; the line-by-line basis math is on adjusted basis.
Depreciation you never took still counts
Some owners never claimed depreciation, or a preparer left an improvement off the schedule. The basis drops anyway, because the rule is allowed or allowable. You pay tax on deductions you never got.
There is a fix if you still own the property: an automatic accounting method change on Form 3115 can catch the missed depreciation up in one year. Details and numbers are on missed depreciation before a sale. Do it before closing, not after.
Find your real basis in five lines
- Purchase price, plus closing costs you paid when you bought (title, recording, transfer tax).
- Plus capital improvements: roofs, additions, remodels, new systems. Repairs do not count.
- Minus the land value. Use the purchase-year county assessor split or an appraisal; this part stays in basis but is never depreciated.
- Minus every year of depreciation on the building and each improvement, from Form 4562 or your depreciation schedule. Count years you skipped as if you had taken them.
- Add the land back. What is left is your adjusted basis. Gain = sale price minus selling costs minus adjusted basis.
Pull the last return that shows the depreciation schedule before you talk price with a buyer. The calculator on this page takes the price, what you paid plus improvements, and the depreciation, and shows the tax.
What a 1031 exchange, an installment sale and a step-up do to recapture
- 1031 exchange: defers the gain, including the depreciation part, but does not erase it. Your old low basis carries into the replacement property, so the replacement starts with less to depreciate. See 1031 exchange vs taxable sale: what owners miss.
- Installment sale: spreads the gain over the years you are paid. The 25% building layer comes out of the first payments (Treas. Reg. 1.453-12) and any Section 1245 recapture is taxed in year one. See installment sale of a rental.
- Holding until death: heirs get a basis equal to value at death (IRC 1014), and the depreciation is never taxed. Estate tax still applies above the exemption; see holding for the step-up.
- Suspended passive losses: a fully taxable sale of the whole rental frees them against any income (IRC 469(g)), which can offset part of the recapture bill (example 3 below).
None of these is right for everyone. Which one fits depends on what you want to own after the sale, your age, your estate and your other income.
What to know
Depreciation is a timing benefit, not a gift: you deducted it against ordinary income while you owned the rental, and a taxable sale brings it back at up to 25% federal. Know your real basis before you set a price or sign a listing agreement, so the net after tax is a number you chose, not one you discover at tax time.
How much tax does this sale cause? A worked example
Married couple in California with $150,000 of other income. Rental bought in 2004 for $400,000 ($120,000 of it land), $80,000 remodel in 2012, sold in 2026 for $1,300,000 less $78,000 of selling costs. Using the remembered basis of $480,000, the gain looks like $742,000 of ordinary long-term capital gain.
Same sale. About $265,000 of straight-line depreciation (building and remodel) lowered the basis to about $215,000, so the gain is $1,007,000, of which $265,000 is unrecaptured Section 1250 gain taxed at up to 25% federal.
What matters is cash: from $1,222,000 of net proceeds the owner expected to keep $1,004,032 after tax and actually keeps $875,863. Same sale, but the couple carried $60,000 of passive losses they could never use. A fully taxable sale of the whole rental to an unrelated buyer releases them against other income (IRC 469(g)).
| Engine run | What the owner expects | What the sale actually causes | Same sale, $60,000 of suspended losses freed |
|---|---|---|---|
| Filing status | Married, joint | Married, joint | Married, joint |
| State | California | California | California |
| Other income (wages, pension, interest) | $150,000 | $150,000 | $150,000 |
| Long-term capital gain | $742,000 | $742,000 | $742,000 |
| Unrecaptured Section 1250 gain (25% max) | $0 | $265,000 | $265,000 |
| Suspended passive losses released | $0 | $0 | $60,000 |
| Federal income tax on the sale | $123,605 | $210,723 | $184,340 |
| Net investment income tax (3.8%) | $24,396 | $34,466 | $32,186 |
| State income tax on the sale | $69,967 | $100,948 | $93,568 |
| Total tax caused by the sale | $217,968 | $346,137 | $310,094 |
| Effective rate on the gain | 29.4% | 34.4% | 30.8% |
| Gain kept after these taxes | $524,032 | $660,863 | $696,906 |
Step by step: What the owner expects
The same example worked by hand from the 2026 tables, so you can follow each line with a calculator. Rounded to the dollar.
- The gain. $742,000 long-term capital gain = $742,000. Other income that year: $150,000, married filing jointly.
- Without the sale. Taxable income is $150,000 less the $32,200 standard deduction = $117,800; regular federal tax on that is $15,340 (2026 brackets, Rev. Proc. 2025-32).
- With the sale. Taxable income becomes $859,800. The ordinary part ($117,800: other income, less the deduction) is taxed at ordinary rates: $15,340. The long-term gain: $495,900 at 15%, $246,100 at 20% = $123,605 (0% to $98,900 and 15% to $613,700 of taxable income, 2026). Regular tax with the sale: $138,945.
- Federal income tax caused by the sale. $138,945 less $15,340 = $123,605.
- Net investment income tax. 3.8% of the smaller of net investment income or income over $250,000 (IRC 1411, not indexed): net investment income from the sale is $742,000; income over the threshold is $642,000. 3.8% x $642,000 = $24,396.
- State. California taxable income rises from $138,200 to $880,200 (income less the $11,800 standard deduction, FTB 2026). $12,194 at 8% = $976; $617,824 at 9.3% = $57,458; $111,982 at 10.3% = $11,534. State tax caused by the sale: $69,967.
- Total. $123,605 + $24,396 + $69,967 = $217,968, which is 29.4% of the gain.
Computed November 10, 2026 by the Big Sale Tax engine (engine.js yearTax): federal brackets, 0/15/20% thresholds and AMT from Rev. Proc. 2025-32 (OBBBA-adjusted) and the One Big Beautiful Bill Act (P.L. 119-21); NIIT under IRC 1411 (thresholds not indexed); state tax from the engine's state table. "Tax caused by the sale" = tax with the sale minus tax without it. Excludes selling costs, local taxes and estimated-tax timing. Education only.
How much tax would you owe? Run your own numbers
2026 law from the engine: federal 0/15/20% brackets (Rev. Proc. 2025-32), 25% cap on unrecaptured 1250 gain, ordinary rates on 1245 recapture, 3.8% NIIT over $200,000 single / $250,000 joint (IRC 1411), AMT, and your state's rules (California on the FTB 2026 schedules).
What was sold and years held only matter in a few states: Washington exempts real estate, Ohio and New Mexico treat a business sale differently, Arizona subtracts 25% for assets bought after 2011 and Oklahoma deducts gain on Oklahoma property held 5 years or more.
Tax shown is the tax caused by the sale. Selling costs are subtracted in the price block above. Excludes local taxes other than Maryland's county tax (3.2% used).
Tick the active-owner box if you materially participate in the business. Education only.
Get this breakdown by email, plus the one-page Seller Tax Worksheet
We email you the numbers from this page (the gain and the federal, 3.8% and state pieces) with a one-page worksheet to fill in with your CPA: your gain line by line, the tax buckets, the 2026 thresholds and five questions to ask before you sign.
Also free: the book Same Sale, Different Tax, the same $1,000,000 gain taxed ten ways. Want it run on your sale? Book a free scope call to see whether the Big Sale Tax Analysis is worth it.
Who you will talk to
Hans Goldstein · Sacramento, California
Hans Goldstein: Tax & Exit Planning, an independent practice. Enrolled Agent, admitted to practice before the Internal Revenue Service. CA Insurance License #4273294, NPN 20602398.
- What happens first
- You fill in the short form for a free scope call, about 5 minutes. Hans reviews every one personally and replies within 1 business day. If it is a fit, you get a link to book the call.
- The scope call
- Fifteen minutes, free: price, timeline, what you are selling and what the money is for. Scope means you hear whether the analysis is worth it for your sale.
- What you get
- A written side-by-side comparison of your cash-sale baseline against every path that fits, year-by-year numbers, a written recommendation, and a review meeting with you and, if you like, your CPA and attorney.
- What it costs
- The scope call is free. The Big Sale Tax Analysis is $5,000 per household per transaction, only if you decide it is worth it. No retainer, no hourly billing, no obligation to use any strategy.
- How Hans is paid
- The $5,000 fee pays for analysis only and is not reduced or credited if you buy anything. You are never required to buy anything. No referral fees are paid to or received from brokers, CPAs or attorneys. Hans is also a licensed insurance producer with a separately owned insurance business. That business is not part of this engagement, and the analysis does not recommend insurance products. If you later choose an installment sale funded through an insurance company, that company pays Hans a commission through his separate insurance business. He may be compensated by that business if you use an insurance-funded installment sale. Hans is an Enrolled Agent (EA), admitted to practice before the Internal Revenue Service. He is not a CPA, attorney or registered investment adviser; the analysis models tax effects and does not recommend specific securities. Read the disclosures.
Book a free scope call or call 213-340-2018. Hans answers or calls back the same business day.
Frequently asked questions
Is my basis in a rental what I paid plus improvements?
What is the depreciation recapture tax rate on a rental in 2026?
Do I pay recapture if I never claimed depreciation?
Can the depreciation on a rental reduce my basis to zero?
Does a 1031 exchange avoid depreciation recapture?
How much tax will I owe on the depreciation when I sell?
Sources
- IRC 1016(a)(2), adjustments to basis, allowed or allowable (Cornell LII)
- IRC 1(h)(6), unrecaptured Section 1250 gain (Cornell LII)
- IRC 168(c), recovery periods (Cornell LII)
- IRS Publication 527, Residential Rental Property
- IRS Publication 544, Sales and Other Dispositions of Assets
- IRC 469(g), dispositions of passive activities (Cornell LII)
Figures as of November 10, 2026; each rate and limit above names its source and year. Education only, not legal or tax advice.
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