The Quick Version
- Depreciation recapture taxes the write-offs you already claimed, at a ceiling of 25% rather than the 15% owners expect.
- On a fifteen-year Fannin County cabin, that layer came to $40,745 of a $134,126 combined bill.
- Basis falls by depreciation allowed or allowable. Never claiming it saves nothing.
- A 1031 exchange postpones recapture. It does not cancel it, and cash boot pulls it back first.
- Death does cancel it. Section 1014 resets basis for whoever inherits.
Last updated August 2026.
Sell a rental you have written down for fifteen years and the first $162,982 of your profit faces a rate as high as 25%, not the 15% most owners assume. That is depreciation recapture. It is the quiet half of the bill, the specific liability a 1031 exchange exists to postpone.
Owners around Blue Ridge tend to meet it late, usually the week a contract goes binding. Their appreciation math was right. The deduction math they forgot was not.
What is depreciation recapture on a rental property?
It is tax on write-offs you already took, collected when you sell. Each year a rental sits in service you deduct part of the structure, which trims taxable income now and erodes basis at the same moment. Lower basis means larger profit later. Recapture settles that timing difference.
Residential rental placed in service after 1986 must use straight-line depreciation under Section 168(b)(3), so nothing exceeds the straight-line amount and none of it becomes ordinary recapture. Instead the deduction-driven slice becomes what the statute names unrecaptured Section 1250 gain. Section 1(h)(1)(E) holds that slice to 25% at most. You pay the lesser of 25% or your ordinary bracket, while appreciation above the slice keeps its 0%, 15%, or 20% treatment.
Two surcharges ride along. The 3.8% net investment income tax under Section 1411 hits whichever is smaller: your net investment income, or the amount by which modified adjusted gross income exceeds $200,000 single and $250,000 married filing jointly. Congress has never indexed those figures since 2013. Georgia then applies its flat 4.99%, cut from 5.19% by House Bill 463 and retroactive to January 1, 2026, per the Department of Revenue.
What does recapture cost on a Blue Ridge cabin?
Close to 30% of the whole tax bill, in the pattern I see most. Picture a cabin purchased in 2011 for $415,000 whose parcel card divided appraised worth into $288,000 structure and $112,000 dirt. A 72% building share yields depreciable basis of $298,800, deducted at $10,865 annually across 27.5 years.
| Line | Figure |
|---|---|
| Purchase price, 2011 | $415,000 |
| Depreciable basis, 72% building | $298,800 |
| Yearly deduction, 27.5-year straight line | $10,865 |
| Claimed over 15 years | $162,982 |
| 2026 sale, less 6% costs | $747,300 |
| Adjusted basis | $252,018 |
| Total profit | $495,282 |
| Unrecaptured Section 1250 slice, 25% | $40,745 |
| Balance at 15% | $49,845 |
| Net investment income tax, 3.8% | $18,821 |
| Georgia, 4.99% | $24,715 |
| Combined | $134,126 |
Recapture is $40,745 of that $134,126, or 30.4%. Look at the shape: those deductions sheltered income at a 24% or 32% ordinary bracket going in, then cost 25% coming out. That spread is why the strategy still works, and why the exit still stings.
One caveat on the arithmetic. A mid-month convention governs residential rental, so the opening year and the closing year each throw off a partial deduction. The table assumes fifteen whole years for legibility.
How do I split land from building in the North Georgia mountains?
Begin with the county parcel card, because dirt never depreciates and mountain dirt carries an outsized share of value here. IRS Publication 527 blesses that shortcut: when separate market values are uncertain, divide cost “based on their assessed values for real estate tax purposes.”
Every Fannin County parcel record published through qPublic lists land and improvement value on separate lines. Georgia assesses at 40% of appraised worth under O.C.G.A. § 48-5-7, and that ratio governs both lines identically, so the proportion printed on the card equals the proportion at full value.
I’m Thomas Echea, and I own homes in Blue Ridge and Fort Lauderdale. Here is what surprises arrivals from metro Atlanta: a long-view tract on a ridge can hold 35% or more of its worth in raw ground, against perhaps 20% for a subdivision lot down in Cobb County. Heavier ground share shrinks the yearly deduction, and shrinks the recapture slice with it. Pull the card for your purchase year, not this one.
Does a 1031 exchange erase depreciation recapture?
No. It postpones recapture alongside every other dollar of profit, a wholly different outcome. A properly structured swap under Section 1031 defers the 25% slice and the capital gain, and the deferred amount rides into the replacement property as carryover basis. You disclose the trade on Form 8824.
Practically, the replacement cabin arrives carrying two schedules. The carryover portion keeps running on the original clock and method, while fresh money you add begins its own 27.5-year life. Your preparer tracks them apart for the remainder of your ownership.
Boot is where deferral leaks. Pull cash out, or trade down and shed debt, and that recognized profit is taxable in the swap year. Ordering rules send the 25% slice out first, ahead of any 15% capital gain, so modest boot can produce a disproportionately expensive result. Deadlines and mechanics appear in how a 1031 exchange works when you sell a rental.
What if I never claimed the depreciation?
You owe recapture regardless. Section 1016(a)(2) reduces basis by depreciation “allowed or allowable,” meaning whatever you were entitled to deduct, claimed or not. Skipping it forfeits the annual benefit and buys nothing at the exit.
This snares owners who ran a cabin informally before treating it as a business. Two or more years of omission is an improper accounting method, repaired on Form 3115 through a single catch-up adjustment rather than amended returns. Omit only the opening year, though, and no method was ever adopted, so the remedy is an amended return or an administrative adjustment request instead. Your CPA chooses the vehicle. Choosing wrong burns a filing season.
Where does cost segregation bite in an exchange?
On the personal property, which stopped qualifying as like-kind after 2017. A cost segregation study reclassifies short-lived components such as appliances, carpet, and certain land improvements onto faster schedules. Those pieces are Section 1245 property, and Section 1245 recapture is ordinary income, sitting above the 25% ceiling rather than beneath it. Cabinets and countertops are genuinely contested: the Tax Court treated them as structural in AmeriSouth XXXII, and the IRS cost segregation guide refuses a bright-line test, so treat that call as facts and circumstances.
Because the Tax Cuts and Jobs Act narrowed Section 1031 to real estate for trades completed after December 31, 2017, any 1245 component leaving in the sale has no like-kind partner to roll into. Owners who accelerated aggressively and then swapped have found ordinary income lodged on a return they believed fully deferred. Eligibility rules live in what qualifies for a 1031 exchange, and the personal-use limits for cabins live in 1031 exchanges for vacation rentals.
What ends recapture for good?
Death, and nothing short of it. Under Section 1014, property included in an estate takes basis equal to market value on the date of death. Deferred profit and accumulated deductions vanish at that instant, and heirs open a fresh 27.5-year schedule on the stepped-up figure.
That is the logic behind swapping repeatedly and never cashing out. It also turns on ownership structure: holdings inside a partnership or non-grantor trust may receive a partial step-up or none. None of this is tax advice, and your basis, entity, and rental history all move the answer. Bring a credentialed CPA in before you sign. Carrying costs on the holding side appear in Fannin County property taxes.
Frequently asked questions
What is the depreciation recapture rate on rental property?
Up to 25%. Straight-line depreciation is mandatory for residential rental placed in service after 1986, so the recaptured portion is unrecaptured Section 1250 gain, which Section 1(h)(1)(E) holds to a 25% ceiling. Below a 25% ordinary bracket, you pay the lower figure.
Does a 1031 exchange avoid depreciation recapture?
It postpones rather than avoids. A fully deferred swap defers the 25% slice and the capital gain together, carrying that amount into the replacement property as reduced basis. The liability resurfaces whenever you sell without exchanging again.
What happens if I never took depreciation on my rental?
You still owe recapture, because Section 1016(a)(2) measures basis against depreciation allowed or allowable. Two or more omitted years are fixed on Form 3115 as one catch-up adjustment. A single omitted year means no method was adopted yet, so an amended return or administrative adjustment request applies instead.
Do I owe Georgia tax on depreciation recapture?
Yes. Georgia sets no separate capital gains rate, so recapture and appreciation both meet the flat individual rate, listed by the Department of Revenue as 4.99% for 2026.
Does taking cash out of a 1031 exchange trigger recapture?
It can. Cash or debt relief counts as boot, and profit is recognized up to the boot received. Ordering rules generally tax the 25% unrecaptured Section 1250 slice ahead of any remainder at capital-gain rates.
How do I split my purchase price between land and building?
Use relative market values, and where those are uncertain, IRS Publication 527 permits allocation by assessed values for real estate tax purposes. Fannin County lists land and improvement values separately on each parcel record, so work from the card for your purchase year.
Does depreciation recapture disappear at death?
Generally yes for property included in the estate. Section 1014 lifts basis to market value on the date of death, wiping out deferred profit and accumulated deductions alike. Holdings through certain partnerships or non-grantor trusts can limit that outcome.
