Depreciation Recapture When You Sell an STR

Recapture is characterization, not a surcharge

Start with what recapture is not: it is not a second, separate gain added on top. Get the sequence right. Depreciation affects the amount of gain upstream, through adjusted basis — the deductions you took during the hold lowered your basis, and gain is amount realized minus adjusted basis (§1001), so a lower basis already produced a larger gain (that's the basis page's job, Principle 53). Once that amount of gain is determined, the recapture and character rules determine how that gain is characterized; they do not impose a second, separate gain. They characterize slices of the gain you already have — deciding which portions are taxed as ordinary income, which as a special capital-gain category, and which as ordinary long-term capital gain.

So the honest mental model is two steps: depreciation set the amount of gain (via basis); the depreciation-related disposition rules then assign character to parts of it. That's why "the IRS takes your depreciation back" is misleading — there's no separate clawback bill; the deductions you took shaped both the size of the gain (through basis) and how slices of it are taxed. The rest of this page is about which slice is which, because the slices are taxed very differently and the differences are where the real money is.

(This is educational information about how the depreciation-related disposition rules work, not individualized tax advice or a computation of your liability. Your actual result depends on your facts and the applicable rules and should be confirmed with your own qualified tax professional. We flag where something is the rule versus our read.)

§1245 property: true ordinary-income recapture

The clearest case is §1245 property — broadly, depreciable personal property and certain components: the shorter-life items a cost-segregation study breaks out of a building (appliances, furniture, flooring, certain fixtures, and land improvements). On a taxable sale at a gain, the depreciation taken on §1245 property is recaptured as ordinary income — to the extent of the depreciation taken, and never more than the actual gain (§1245(a)). This is true recapture: the deduction you took at ordinary-income rates during the hold is characterized back as ordinary income at sale, capped at the lower of the depreciation or the gain.

This is the slice that behaves the way people think all recapture behaves — and it's exactly the slice cost segregation tends to enlarge (more on that below).

The building: why "§1250 recapture" is usually not the story

For the building itself — §1250 property, i.e., real property — the rule is different and routinely misstated. §1250's ordinary-income recapture applies only to "additional depreciation": depreciation taken in excess of the applicable straight-line amount (§1250(a),(b)).

Here's the consequence that matters for almost every modern STR: because depreciable real property subject to modern straight-line depreciation generally has no additional depreciation, ordinary-income §1250 recapture generally does not arise on the building — because §1250 targets additional depreciation beyond the applicable straight-line amount. That does not mean the depreciation disappears at sale. It means the depreciation-related portion of your long-term gain is generally handled by a different rule — the capital-gain category described next — rather than being characterized as ordinary income.

Separately identified components may be subject to different character rules — including §1245 — depending on the property involved. That's the bridge to cost segregation, below.

Unrecaptured §1250 gain: a capital-gain category, not recapture

This is the concept the whole page exists to get right. The portion of your long-term gain attributable to the straight-line depreciation you took on real property is called unrecaptured §1250 gain (§1(h)). Read the label carefully: despite the "§1250" in the name, it is not recapture and it is not ordinary income. It is long-term capital gain — it simply carries its own maximum rate rather than the general long-term capital-gain rate (the specific rate is current law and lives on the exit-tax anatomy page, not here).

So the depreciation you took on the building comes back at sale — but as a capital-gain category with a rate ceiling, not as ordinary-income recapture. Calling it "§1250 recapture" or "depreciation recaptured at [a rate]" collapses two different rules into one and gets the character wrong. Throughout this domain we keep them separate: "recapture" is reserved for §1245/§1250 ordinary-income treatment; the capital-gain category is always "unrecaptured §1250 gain."

How the pieces get characterized — in order, not as a tax return

It helps to see the sequence the depreciation-related rules follow — while remembering this is a characterization order, not a complete tax-return computation (the assembled calculation, with rates and the other layers, is the exit-tax anatomy page's job):

1. Determine the gain — amount realized minus adjusted basis (§1001). This total is fixed; the steps below only assign character to parts of it.

2. Identify the property and its components — the building (§1250 real property) versus any §1245 personal-property components (often the ones a cost-seg study created).

3. Apply the applicable recapture rules — §1245 ordinary-income recapture on the qualifying components; §1250 ordinary-income recapture only to the extent of any additional (above-straight-line) depreciation.

4. Characterize the remaining gain — the depreciation-related real-property portion as unrecaptured §1250 gain (its capital-gain category), and the rest as ordinary long-term capital gain.

Notice what these steps do: once step 1 has determined the amount of gain, steps 2–4 only assign character to slices of it — they don't create additional gain. (The depreciation that helped size the gain did so earlier, in step 1, through adjusted basis.)

What cost segregation does to the character

This is where the loop back to the Tax domain closes. A cost-segregation study can create §1245 property by reclassifying parts of the building into shorter-life components. The disposition consequence of that isn't only about timing (which the cost-seg decision guide covers) — it's about character: to the extent a study creates §1245 property, it can shift part of your eventual gain toward ordinary-income recapture, where the same basis left in the §1250 building would generally have come back as unrecaptured §1250 gain (a capped-rate capital category).

Our read, stated carefully: this is a reason to look at the exit character before treating accelerated depreciation as a stand-alone tax win — not a rule that "every dollar you move into shorter-life property becomes ordinary income later." Actual recapture is bounded by the applicable statutory rules and by the gain you actually realize; whether the character shift is net-adverse depends on your facts. The point is simply that acceleration can change what kind of tax you meet at sale, not just when — so the two ends belong in one decision. (What depreciation is → Principle 47; whether to run a study → Principle 51; this page owns only what the depreciation does to character at sale.)

An exchange carries the character along

One more connection, at a routing level: a qualifying §1031 exchange can defer recognition, but it does not erase the depreciation-related character embedded in the deferred gain — that character rides along until a later recognition event. Principle 55 owns the recognition, boot, basis, and exchange mechanics; this page just flags that an exchange defers, rather than clears, what's described above.

The bottom line

When you sell, your depreciation doesn't get handed back as a separate bill — it changes the character of a gain that's already fixed by your basis. The shorter-life §1245 components (the ones cost segregation tends to create) can come back as ordinary-income recapture; the building's straight-line depreciation generally comes back not as recapture at all but as unrecaptured §1250 gain, a capital-gain category with its own rate ceiling. Getting those two straight is the whole game: it's the difference between an accurate exit plan and a nasty surprise, and it's why accelerating depreciation is a decision about character and timing together, not a free deduction. Know which slice is which before you sell — and before you accelerate.

About the author

Matt Nunn is the founder of Builders Finance. He has spent two decades working with the financial side of real estate businesses, and started Builders Finance to give short-term-rental operators the financial systems, frameworks, and plain-language education that most hosting advice skips over. Builders Finance publishes educational content for STR owners; it is not legal or tax advice, tax treatment depends on your facts and circumstances, and it is not a substitute for guidance from your own qualified tax professional.

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Educational information only — not individualized tax, legal, or investment advice. The worked example is an illustrative model, not a projection or a recommendation.