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STR Depreciation Recapture When You Sell: The Full Math

Recapture = 25% on ALL depreciation taken (standard + OBBBA bonus). Example: $169K prior dep → $42K federal recapture at sale (+ state: CA adds $22K). Installment sale myth: recapture due in FULL in year of sale (capital gain deferred, not recapture). Primary residence exclusion does NOT shelter recapture. Only 1031 (defers all) or hold-to-death (stepped-up basis eliminates all) avoid recapture. Own Luxury Homes® 12-Point Agent Integrity Audit™ — full recapture math before any sale decision.

STR Depreciation Recapture When You Sell: The Math Nobody Warns You About

25%

Section 1250 recapture rate on ALL prior depreciation — regardless of long-term capital gains rate

OBBBA

100% bonus dep in year one means a large recapture bill crystallizes the moment you sell

No offset

Depreciation recapture cannot be eliminated by primary residence exclusion or installment sale

1031

A 1031 exchange is the only way to defer recapture — or hold until death for a stepped-up basis

Most STR investors who pursued 100% bonus depreciation under the OBBBA know about the year-one tax savings. Many do not fully understand what happens when they sell. Depreciation recapture is not the same as capital gains tax. It is taxed at a different rate, it applies to every dollar of depreciation ever taken, and it cannot be reduced by the strategies investors typically use to minimize capital gains. This page runs the exact math so you know precisely what you owe before you list.

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What Depreciation Recapture Is and Why It Exists

When you depreciate a rental property, you are taking a tax deduction that reduces your current income. The IRS treats this as a reduction in your cost basis in the property. When you sell, the government "recaptures" the tax benefit of those deductions by taxing the gain attributable to prior depreciation at a higher rate than standard long-term capital gains. For real property (Section 1250 property): recapture rate is 25% maximum federal.

The Two Components of Tax at Sale

Tax Component	What It Covers	Federal Rate	Can It Be Reduced?
Section 1250 recapture	All depreciation previously taken (standard + bonus)	25% maximum	No — only 1031 exchange or hold-to-death defers/eliminates it
Long-term capital gains	Appreciation above original purchase price (after recapture)	0/15/20% based on income	Yes — primary residence exclusion, installment sale, QOZ reinvestment
Net Investment Income Tax	3.8% on investment income above $200K/$250K threshold	3.8%	Only by staying below income threshold
Recapture is applied first, before capital gains are calculated. The taxable capital gain is reduced by the amount treated as recapture. This matters for rate calculations but not for total tax — the recapture tax is real regardless.

The Recapture Math: OBBBA Bonus Dep Scenario

Line Item	Amount	Notes
Purchase price (2025)	$650,000	—
Land allocation (20%)	−$130,000	Not depreciable
Depreciable basis	$520,000	—
5/15-year property via cost seg (30%)	$156,000	100% bonus dep in year one under OBBBA
Year-one bonus depreciation deduction	$156,000	Full amount deducted in tax year of acquisition
Standard 27.5-year dep (year 1, partial)	$13,527	On remaining $364K structure at 1/27.5
Total year-one depreciation	$169,527	—
Sale price (year 3)	$780,000	—
Adjusted basis at sale	$480,473	$650K − $169,527 total depreciation taken
Total gain at sale	$299,527	$780K − $480,473
Section 1250 recapture (all depreciation)	$169,527	Taxed at 25% = $42,382 federal recapture tax
Remaining long-term capital gain	$130,000	Taxed at 15–20% depending on income
LTCG tax at 15%	$19,500	—
Total federal tax at sale	$61,882	Before state tax; recapture alone = $42K
The investor who took $169,527 in year-one depreciation (saving ~$62,700 at 37% rate) now owes $42,382 in recapture tax at sale. Net tax benefit across the hold period: ~$20,318 — plus the time value of the deferral (real, but smaller than the gross deduction suggests).

How the Recapture Interacts With Different Exit Strategies

Exit Strategy	Capital Gains	Recapture	State Tax	Total At-Sale Tax
Outright sale (Year 3)	Paid now at 15–20%	Paid now at 25%	Paid now	Highest immediate tax
Installment sale	Spread over multiple years (deferred)	CANNOT be deferred — all recapture in year of sale	Year of sale	Recapture still due in full at closing
1031 exchange	Deferred indefinitely	Deferred indefinitely	Deferred	Zero at sale; carries to replacement property
Primary residence conversion + sale	Partially excluded ($250K/$500K on qualified-use portion)	NOT sheltered by exclusion — recapture still due in full	Depends on state	Exclusion helps CG; recapture is unchanged
Hold to death / heirs inherit	Eliminated (stepped-up basis)	Eliminated (step-up resets basis; recapture gone)	None	Zero — most tax-efficient exit
The installment sale myth: many sellers believe spreading the sale over multiple years defers recapture. It does not. Section 1250 recapture is due in the year of sale regardless of payment schedule. Only the capital gain portion can be deferred via installment.

State Recapture Tax Adds to the Federal Bill

Most states that have income taxes also tax depreciation recapture, typically at ordinary income rates. California taxes recapture at up to 13.3%. New York at up to 10.9%. On $169,527 of recapture: California state recapture tax = ~$22,547. Combined federal + California recapture = ~$64,929 on that $169,527. Always calculate total federal + state before deciding whether to sell or 1031.

The 1031 Exchange: The Only Recapture Deferral Tool

A 1031 like-kind exchange defers both capital gains AND depreciation recapture by reinvesting the sale proceeds into a qualifying replacement property. The deferred recapture carries forward as a reduction in the replacement property’s basis. When the replacement property is eventually sold (without another 1031), the recapture is due. If the replacement property is held until death, the stepped-up basis eliminates the accumulated recapture permanently.

“The conversation I have most often with STR sellers is: "I thought I saved $60,000 in taxes when I bought this. Why do I owe $42,000 in recapture now?" The bonus depreciation deduction and the recapture tax are two sides of the same transaction. The deduction was real. The recapture is real. The net benefit is the time value of the deferral and the rate differential (deducted at 37% ordinary rate, recaptured at 25%). For a long-term hold or a 1031 into another property, bonus dep is a clear win. For a 2–3 year hold with an outright sale, run the full math before you decide the strategy worked.”

— Ryan Brown, Principal Broker & CEO, Own Luxury Homes®

What is depreciation recapture on a short-term rental?

When you sell an STR, the IRS recaptures all depreciation deductions previously taken (including OBBBA bonus depreciation) and taxes them at a maximum 25% federal rate. This is separate from and in addition to capital gains tax on appreciation. On $169,000 of prior depreciation: $42,250 in federal recapture tax.

Does an installment sale avoid depreciation recapture?

No. Section 1250 depreciation recapture is due in full in the year of sale regardless of how the payments are structured. Only the capital gain portion (appreciation above basis) can be deferred via installment sale. The recapture portion cannot be spread across years.

Does the primary residence exclusion reduce depreciation recapture?

No. The $250,000/$500,000 primary residence exclusion applies to capital gains but does not shelter depreciation recapture. Even if you convert an STR to your primary residence and meet the 2-of-5-year rule, all depreciation taken during the STR period is still recaptured at 25% when you sell.

How do I avoid depreciation recapture on an STR?

Two options: (1) 1031 exchange — defer both capital gains and recapture by reinvesting into a replacement investment property (45-day ID, 180-day close, qualified intermediary required). (2) Hold until death — the stepped-up basis at death eliminates all embedded gains and recapture permanently. An outright sale has no mechanism to avoid or reduce recapture.

Related Guides

Own Luxury Homes® — STR transaction specialists who run the full recapture math before any sale decision. 12-Point Agent Integrity Audit™. Talk to an STR transaction specialist ›

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— Ryan Brown, Principal Broker & CEO, Own Luxury Homes® (FL License BK3626873)