Depreciation Recapture

Depreciation recapture is the tax due at sale on depreciation deductions taken while owning a property. For US real estate, the gain attributable to straight-line depreciation is generally taxed at a maximum 25% rate. It is part of the after-tax picture that the pre-tax cap rate does not show.

If the example property's building portion is depreciated at about $14,545 a year for five years, about $72,700 of deductions will have been taken. At the 25% maximum rate, recapture on that could be up to about $18,200 at sale, whatever the property's price has done.

Recapture is why depreciation is best thought of as a tax deferral rather than a permanent saving. A like-kind exchange can defer it along with the capital gain.