Depreciation Recapture

Depreciation recapture is the tax collected on a sale for the depreciation deductions an owner took while holding the property. In the US, the part of a rental's gain that comes from straight-line depreciation faces a federal rate capped at 25%. It has no effect on NOI, which is calculated before depreciation.

The default house depreciates about $14,545 a year on a $400,000 building. After ten years the owner has deducted roughly $145,000. On a sale at or above the purchase price, that amount is recaptured, which could mean up to about $36,000 of federal tax at the 25% cap.

Recapture is why depreciation is a deferral rather than a permanent saving. Investors who plan to sell should model it alongside capital gains. A 1031 exchange can postpone it by rolling the gain into another property. Confirm the numbers with a tax professional.