The deal you made without noticing
Every year you own a rental, the tax code lets you deduct a slice of the building's value as depreciation — roughly the building's cost divided by 27.5 for residential property. It's a genuine yearly tax saving. But it comes with a string attached: each deduction lowers what you officially "have into" the property. When you sell, that lower number makes your taxable profit bigger, and the slice of profit attributable to depreciation is taxed at up to 25% instead of the friendlier capital gains rates.
"Allowed or allowable" — the trap for non-deducters
Recapture applies to depreciation that was allowed or allowable. Translation: if you were entitled to the deduction and never took it, the IRS taxes you at sale as if you had. Skipping depreciation gives you the worst of both worlds — no yearly savings, full recapture bill. (A tax professional can often recover missed depreciation with a Form 3115 filing before you sell.)
How a 1031 exchange handles it
When you exchange real estate for real estate, recapture defers right along with your capital gains — it rides into the new property inside your carryover basis. It only comes due if you take boot (recapture is taxed first, before any capital gains) or eventually sell without exchanging. For owners of long-held rentals, deferring recapture is often the single biggest dollar reason to exchange.
Estimate your recapture bill →From your purchase price, land share, and years owned — or your known total