Every year a rental property in Orlando is depreciated on a tax return, the IRS is keeping a running tab. Depreciation recapture tax is how that tab gets settled at sale, and it catches owners who tracked their annual deduction closely but never added up what the cumulative total would cost them the moment the property changed hands.
What Gets Recaptured
Recapture applies to the total depreciation claimed against a property over its holding period, whether the building was a small retail strip near Ocoee or a multifamily complete in Altamonte Springs. It does not apply to land value, since land is never depreciated in the first place, only to the depreciable structure and any improvements added to it.
The Rate Is Capped, Not Tied to Your Bracket
Unrecaptured Section 1250 gain, the technical term for depreciation recapture on real property, is taxed at a rate capped at 25 percent, separate from the long-term capital gains rate applied to the rest of the sale's profit. A high-income seller in the top capital gains bracket may actually see their recapture taxed at a lower rate than their gain; a lower-income seller can see the opposite, where recapture pushes their effective rate on that portion above what they would otherwise pay.
Why It Grows Larger the Longer a Property Is Held
Because recapture is cumulative, a property held and depreciated for fifteen or twenty years generates a recapture liability far larger than one held for three or four, even if the two properties sell for similar prices. Long-term owners of older Orlando-area rentals, properties bought decades ago near downtown or in Winter Park before the current wave of appreciation, are often the ones most surprised by the size of the number.
Recapture on a Cost-Segregation Study
Owners who used a cost-segregation study to accelerate depreciation on shorter-lived components, such as parking lots or certain building systems, front-loaded larger deductions in early years, which also front-loads a larger recapture exposure at sale. That trade-off can still be worthwhile for the tax savings during ownership, but it means the recapture bill at exit deserves the same level of planning the depreciation strategy received going in.
Deferring Recapture the Same Way as the Capital Gain
A 1031 exchange defers depreciation recapture along with the capital gain when the sale proceeds roll into a replacement investment property through a qualified intermediary. The recapture liability does not disappear; it carries forward and attaches to the replacement property, becoming due only if that property is eventually sold without another exchange behind it.
How an Exchange Into a Different Asset Class Handles Recapture
An owner exchanging out of a fully depreciated retail strip near Cocoa into a newer industrial building elsewhere in the metro is not erasing the accumulated recapture by changing asset types; it simply carries forward attached to the replacement property's basis regardless of what kind of real estate that replacement turns out to be. The new property then starts its own depreciation schedule going forward, but the deferred recapture from the relinquished property remains part of the picture if that new property is ever sold outright.
This is one of the more commonly misunderstood pieces of an exchange, since investors sometimes assume moving into a different property type resets the recapture exposure the way it resets the depreciation schedule. It does not, and confirming the carried-forward number before closing avoids an unpleasant surprise years later.
Common 1031 Exchange Questions
What is depreciation recapture tax?
It is the tax owed on the total depreciation claimed against a property during ownership, charged when the property sells. It is calculated separately from, and in addition to, the regular capital gains tax on the sale's profit.
What is the tax rate on depreciation recapture?
It is capped at 25 percent for real property, which is different from the standard long-term capital gains rates and can be higher or lower than a seller's regular capital gains rate depending on their income.
Does recapture apply to the land as well as the building?
No. Only the depreciable portion of the property, the structure and qualifying improvements, generates recapture. Land is never depreciated, so it is never subject to recapture.
Can I avoid depreciation recapture by selling at a loss on paper?
Recapture is based on depreciation claimed, not on whether the sale itself shows a gain relative to the original purchase price. Even a property sold near its original cost can generate recapture if substantial depreciation was taken.
Does a 1031 exchange eliminate depreciation recapture or just delay it?
It delays it. The recapture liability carries into the replacement property's basis and becomes due if that property is later sold without another exchange to defer it again.
