What Happens to Depreciation When I Sell My STR?
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When you sell your STR at a gain, the IRS recaptures the depreciation you claimed—taxing it separately from your capital gains. Under IRC §1250, unrecaptured real property depreciation is taxed at up to 25%; under IRC §1245, personal property depreciation (furniture, appliances) is recaptured at ordinary income rates. You cannot avoid this by skipping depreciation deductions—the IRS taxes what was "allowed or allowable."
The Two Types of Depreciation Recapture
Depreciation recapture is not a single calculation—it splits into two separate categories based on what type of property generated the depreciation:
§1250 Unrecaptured Depreciation (Real Property)
Max 25% Federal RateApplies to depreciation claimed on the building structure (27.5- or 39-year real property). The "unrecaptured" portion is taxed at a maximum rate of 25%—higher than standard long-term capital gains rates (0/15/20%) but lower than ordinary income rates.
§1245 Recapture (Personal Property)
Ordinary Income RatesApplies to depreciation claimed on furniture, appliances, and other personal property (5-year and 7-year MACRS assets). This recapture is taxed at your ordinary income rates—up to 37% federally. If you took 100% bonus depreciation on $40,000 of furniture, all $40,000 is subject to §1245 recapture when those assets are sold.
The "Allowed or Allowable" Rule: Why Skipping Depreciation Doesn't Help
This is one of the most important—and most misunderstood—rules in rental property taxation. The IRS recaptures depreciation that was "allowed or allowable" under the tax code. This means:
If you owned a rental property for 8 years and never claimed a single dollar of depreciation (perhaps because you or your CPA made an error), the IRS will still calculate your adjusted basis as if you had taken the full depreciation each year. When you sell, your taxable gain is larger because your basis is lower—and you still owe the recapture tax on the depreciation you should have taken.
If you haven't been claiming depreciation on your STR, you are in the worst possible position: you gave up years of tax deductions AND you will still owe recapture tax when you sell. Fix this by filing Form 3115 to claim a §481(a) adjustment and catch up all missed depreciation in the current year. This is one of the most valuable corrections available to STR owners.
Complete Example: Recapture Calculation
Sale After 8-Year Ownership
Complete CalculationPurchase price: $500,000. Land: $100,000. Building basis: $400,000. Furniture/appliances (100% bonus depreciation year 1): $35,000. Held 8 years. Sold for $720,000.
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Furniture depreciation taken: $35,000 (100% Year 1)
Adjusted basis: $535,000 (property + furniture) − $116,364 − $35,000 = $383,636
Total gain on sale: $720,000 − $383,636 = $336,364
§1245 recapture (furniture): $35,000 @ ordinary rates (say 32%) = $11,200
§1250 unrecaptured (building): $116,364 @ 25% = $29,091
Remaining long-term gain: $336,364 − $35,000 − $116,364 = $185,000 @ 15%/20%
Total federal tax on sale: ~$11,200 + $29,091 + $27,750 = ~$68,041
On the 39-year schedule: building depreciation $400,000 ÷ 39 × 8 = $82,051; §1250 unrecaptured $82,051 @ 25% = $20,513; total federal tax ~$11,200 + $20,513 + $27,750 = ~$59,463
Tax Rates on Each Component of Gain
| Type of Gain | Source | Max Federal Rate |
|---|---|---|
| §1245 recapture | Furniture/appliance depreciation | 37% (ordinary) |
| §1250 unrecaptured gain | Building depreciation | 25% |
| Long-term capital gain | Appreciation above original cost | 20% + 3.8% NIIT |
Strategies to Defer or Reduce Recapture
1031 Like-Kind Exchange
A 1031 exchange under IRC §1031 defers both capital gains and depreciation recapture by rolling the sale proceeds into a replacement property. You must identify a replacement property within 45 days and close within 180 days. All accumulated depreciation recapture is deferred until you eventually sell the replacement property (or execute another 1031). This is the most powerful tool for deferring the recapture tax indefinitely.
Installment Sale
Under IRC §453, you can spread the recognition of gain (and recapture) over multiple years by receiving payments over time instead of a lump sum at closing. Recapture income is accelerated into the year of sale under §453(i) for §1245 property, but §1250 unrecaptured gain can be spread over the installment period. This strategy reduces the tax rate impact if it moves income into lower brackets in future years.
Qualified Opportunity Zone Investment
Investing capital gains (but not recapture income) into a Qualified Opportunity Zone fund can defer and potentially reduce the capital gains portion of a sale. However, §1245 recapture and §1250 unrecaptured gain are not eligible for this deferral.
Track your cumulative depreciation balance every year—not just for tax returns, but for exit planning. Knowing your adjusted basis and total depreciation taken allows you to model the tax cost of a sale years in advance, giving you time to plan a 1031 exchange or other strategy before you're committed to selling.
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Disclaimer
This article is for informational purposes and does not constitute tax, legal, or financial advice. Tax rules vary based on your specific situation, filing status, entity structure, and jurisdiction. Always consult a qualified CPA or tax professional for guidance on your specific tax situation. IRS rules and thresholds are subject to change—verify current requirements at irs.gov before filing.
Frequently Asked Questions
What is depreciation recapture when selling an STR?
Depreciation recapture is the IRS mechanism that taxes you on the depreciation deductions you claimed (or should have claimed) when you sell a rental property at a gain. For real property (the building), unrecaptured §1250 gain is taxed at a maximum rate of 25%. For personal property like furniture (§1245 property), recapture is taxed at ordinary income rates.
Can I avoid depreciation recapture by not claiming depreciation?
No. The IRS taxes depreciation that was 'allowed or allowable' — meaning even if you forgot to claim depreciation deductions in prior years, the IRS will still tax you as if you had taken them when you sell. This is why it's critical to claim all depreciation you're entitled to each year — you pay the recapture tax regardless, so you might as well have received the deductions.
How can I defer depreciation recapture when selling my STR?
The primary deferral strategy is a 1031 like-kind exchange, which allows you to defer both capital gains and depreciation recapture by rolling the proceeds into a replacement property. An installment sale can spread the recapture income over multiple years, though this requires careful structuring. There is no way to permanently eliminate recapture (other than death, which resets basis for heirs).
What is the tax rate on depreciation recapture for STR real property?
Unrecaptured §1250 gain (from depreciation on the building, on either the 27.5- or 39-year schedule) is taxed at a maximum federal rate of 25% — higher than the standard 0%/15%/20% long-term capital gains rate, but lower than ordinary income rates. §1245 recapture (from personal property like furniture) is taxed at ordinary income rates, which can be up to 37% federally.