Depreciation Recapture
Tax on the depreciation you previously deducted — taxed at a higher rate than ordinary capital gains.
Definition
While you own a rental, you deduct depreciation each year, which lowers your adjusted basis. When you sell, the portion of your gain attributable to that depreciation is "recaptured" — for real estate, this unrecaptured §1250 gain is taxed at a federal rate of up to 25%, higher than the long-term capital gains rate. A 1031 exchange defers depreciation recapture along with the rest of the gain.
Why it matters
Recapture is an under-appreciated cost of selling — it can be the single largest piece of the tax bill on a long-held, heavily depreciated property, which makes deferring it through a 1031 especially valuable.
Related terms
General education — not tax or legal advice. This explains how §1031 exchanges work in general terms and uses simplified assumptions. Rules and tax rates change and your situation is specific. Talk to a qualified CPA or tax attorney before you rely on any of it. See our full terms & legal notice.