You sell your rental property for a healthy gain, expect to pay the usual long-term capital gains rate, and then your tax preparer delivers the news: part of that gain is taxed at 25%, not 15% or 20%. This is depreciation recapture, and it catches a surprising number of South Florida landlords off guard every single year. If you own rental real estate in Miami-Dade County or anywhere else and you are thinking about selling, understanding how depreciation recapture works could save you thousands of dollars in missed planning opportunities.
Depreciation recapture is the IRS's way of taking back some of the tax benefit you received while you owned the property. Every year you claimed a depreciation deduction, you lowered your taxable rental income. When you sell, the IRS wants a piece of that benefit back, and it taxes it at a higher rate than your typical long-term capital gain. Specifically, the portion of your gain attributable to depreciation on real property, often called unrecaptured Section 1250 gain, is taxed at a maximum rate of 25% federally, regardless of your regular capital gains bracket.
What Is Depreciation Recapture and Why Does It Exist
Depreciation recapture applies when you sell real property for more than its adjusted basis after taking depreciation deductions over the years you owned it. The IRS allows residential rental property to be depreciated over 27.5 years and commercial property over 39 years, using straight-line depreciation under the Modified Accelerated Cost Recovery System (MACRS).
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Each year, that depreciation deduction reduces your taxable rental income, which is a real cash flow benefit while you hold the property. But depreciation also reduces your cost basis in the property. When you sell, a lower basis means a bigger gain, and the IRS taxes the portion of that gain equal to depreciation taken at the unrecaptured Section 1250 rate of 25%, capped at your actual capital gains rate if lower.
This rule exists because Congress does not want investors to get a double benefit: a deduction during ownership and then full capital gains treatment on the same dollars at sale. The 25% rate is Congress's compromise between ordinary income rates (which could reach 37%) and the lower long-term capital gains rates.
Section 1250 Property vs Section 1245 Property
Real property like rental buildings falls under Section 1250 of the tax code, while personal property such as appliances, furniture, and certain equipment inside a rental falls under Section 1245. Section 1245 property depreciation recapture is taxed as ordinary income, which can be even less favorable than the 25% Section 1250 rate. This is one reason cost segregation studies require careful planning: accelerating depreciation on personal property components can increase your tax bill at sale if not managed correctly.
How to Calculate Depreciation Recapture on a Rental Sale
The calculation involves a few clear steps. Here is how it works in practice.
- Determine your original basis. This is typically your purchase price plus closing costs and capital improvements, minus any land value (land is not depreciable).
- Calculate total depreciation taken. Add up every year of depreciation deductions claimed on Schedule E since you placed the property in service.
- Find your adjusted basis. Subtract total depreciation from your original basis.
- Calculate total gain. Subtract adjusted basis from your net sale price (sale price minus selling costs).
- Separate the gain. The portion of the gain equal to depreciation taken is unrecaptured Section 1250 gain, taxed at up to 25%. Any remaining gain is taxed at standard long-term capital gains rates.
Example 1: A Coral Gables Duplex Sale
A Coral Gables investor purchased a duplex in 2014 for $450,000, with $100,000 allocated to land and $350,000 to the building. Over 12 years of ownership, she claimed $152,727 in depreciation (roughly $12,727 per year using the 27.5-year schedule). Her adjusted basis is now $450,000 minus $152,727, or $297,273.
She sells the property in 2026 for $780,000, with $40,000 in selling costs, netting $740,000. Her total gain is $740,000 minus $297,273, equaling $442,727.
Of that gain, $152,727 is unrecaptured Section 1250 gain taxed at 25%, which comes to $38,182 in federal tax on that portion alone. The remaining $290,000 of gain is taxed at her long-term capital gains rate, likely 15% or 20% depending on her total income, adding another $43,500 to $58,000. Her total federal tax bill on this sale lands between $81,682 and $96,182, not counting Net Investment Income Tax.
Net Investment Income Tax Adds Another Layer
Many South Florida investors forget that a rental sale gain is generally subject to the 3.8% Net Investment Income Tax (NIIT) on top of capital gains and recapture tax, if their modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly. Florida has no state income tax, which is a real advantage for Miami-area entrepreneurs, but the federal NIIT still applies regardless of where you live.
Example 2: Adding NIIT to a Miami Investor's Sale
A Miami investor has $442,727 in gain from a rental sale, as in the example above, and her total income for the year including the gain pushes her well above the $250,000 NIIT threshold for joint filers. The entire $442,727 gain is subject to the 3.8% NIIT, adding $16,824 to her tax bill. Combined with recapture and capital gains tax, her total federal liability on this single transaction could exceed $110,000.
Tax Rate Comparison Table
| Type of Gain | Applicable Rate | Notes |
|---|---|---|
| Unrecaptured Section 1250 gain | Up to 25% | Limited to total depreciation claimed |
| Section 1245 property recapture | Ordinary income rates up to 37% | Applies to appliances, equipment, personal property |
| Remaining long-term capital gain | 0%, 15%, or 20% | Based on total taxable income |
| Net Investment Income Tax | 3.8% | Applies above $200,000 single or $250,000 joint MAGI |
| Florida state tax on gain | 0% | Florida has no personal income tax |
Strategies to Reduce the Tax Hit
The good news is that depreciation recapture is predictable, which means it is plannable. South Florida business owners and real estate investors have several legitimate tools available.
1031 exchange. A like-kind exchange under Section 1031 allows you to defer both capital gains tax and depreciation recapture by rolling the proceeds into another investment property. The recapture is not eliminated, it is deferred, and your basis carries over into the replacement property. This remains one of the most powerful tools for Miami-area entrepreneurs building a real estate portfolio.
Installment sale. Spreading the sale over multiple tax years using a seller-financed installment sale can smooth out the income and potentially keep you in a lower capital gains bracket for the non-recapture portion, though recapture itself is generally due in the year of sale regardless of payment timing.
Timing the sale around other income. If you have flexibility, selling in a year with lower overall income, perhaps a year you are scaling back business operations or have significant deductions, can reduce your marginal rate on the capital gains portion and help you stay under NIIT thresholds.
Charitable remainder trust. For larger gains, donating the property to a charitable remainder trust before sale can defer and reduce the tax impact while creating an income stream and a charitable deduction, though this strategy requires careful structuring.
Offsetting with capital losses. If you hold other investments with unrealized losses, harvesting those losses in the same tax year can offset a portion of the capital gain, though losses cannot offset the 25% recapture rate dollar for dollar in all scenarios without careful ordering rules.
Example 3: Comparing a Straight Sale to a 1031 Exchange
An entrepreneur in Coral Gables sells a rental with $200,000 in accumulated depreciation and $300,000 in total gain. A straight sale triggers roughly $50,000 in recapture tax (25% of $200,000) plus capital gains tax of about $15,000 to $20,000 on the remaining $100,000, plus potential NIIT of $11,400. Total tax liability lands near $76,400 to $81,400.
By structuring a 1031 exchange into a replacement property, all of that tax is deferred, preserving the full $300,000 in equity to reinvest into a larger South Florida property, continuing to build wealth without an immediate tax drag.
Strategy Comparison Table
| Strategy | Tax Impact | Best For |
|---|---|---|
| Straight sale, no planning | Full recapture plus capital gains plus NIIT due immediately | One-time exits, downsizing |
| 1031 exchange | Tax fully deferred, basis carries forward | Investors reinvesting in real estate |
| Installment sale | Capital gains spread over years, recapture due upfront | Sellers wanting steady income |
| Charitable remainder trust | Gain spread over trust term, deduction available | High net worth donors |
| Loss harvesting | Partial offset of capital gains portion | Investors with existing portfolio losses |
Why This Matters More for South Florida Real Estate Investors
Property values across Miami-Dade County have appreciated significantly over the past decade, which means depreciation recapture bills are often larger here than in slower-growth markets. A rental purchased in 2014 in Coral Gables, Brickell, or Coconut Grove has likely seen both strong appreciation and years of depreciation deductions stack up, creating a bigger tax reckoning at sale. South Florida business owners who treat real estate as part of a broader wealth strategy need proactive planning, not a surprise call from their accountant in April.
This is exactly the kind of planning our team handles through business tax strategy engagements, where we model out the full tax impact of a sale before you sign the closing documents, not after.
Work With a South Florida CPA Before You List the Property
Depreciation recapture is not avoidable if you sell outright, but it is manageable with the right planning. The biggest mistake we see is investors who involve their tax advisor only after the closing, when nearly every planning opportunity has already closed too. If you are weighing a sale, our virtual CPA services let you run projections and compare strategies remotely, no matter where in Miami-Dade County your property sits. For investors who also manage ongoing rental operations, pairing that planning with managed accounting and small business bookkeeping ensures your depreciation schedules stay accurate year over year, which makes the eventual sale calculation far more precise.
Frequently Asked Questions
Q: What is depreciation recapture on a rental property sale? A: Depreciation recapture is the tax owed on the portion of your gain equal to the depreciation deductions you claimed while owning the rental. For real property, this is called unrecaptured Section 1250 gain and is taxed at a maximum federal rate of 25%, higher than the typical 15% or 20% long-term capital gains rate.
Q: Can I avoid depreciation recapture entirely? A: You cannot avoid it permanently if you sell outright, but you can defer it indefinitely through a 1031 exchange by reinvesting proceeds into another qualifying property. Other strategies like charitable remainder trusts or installment sales can reduce or spread the tax impact, which is why planning ahead with a tax professional matters.
Q: Does Florida have a state tax on rental property sale gains? A: No. Florida has no personal state income tax, so South Florida investors only owe federal capital gains tax, depreciation recapture, and potentially Net Investment Income Tax on a rental sale. This is a meaningful advantage compared to states like California or New York, though the federal tax bill still applies in full.
Q: What is the most common mistake investors make with depreciation recapture? A: The most common mistake is waiting until after the sale closes to talk with a tax advisor, which eliminates options like a 1031 exchange or installment sale structuring. Another frequent error is forgetting to account for depreciation recapture when estimating net proceeds, leading to an unpleasant surprise at tax time.
Q: How does depreciation recapture interact with the Net Investment Income Tax? A: The entire gain from a rental sale, including the recaptured portion, generally counts toward Net Investment Income Tax if your modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. This adds an additional 3.8% on top of recapture and capital gains tax, which can push the effective rate on part of your gain close to 29%.
Q: Should I get a cost segregation study if I plan to sell within a few years? A: Cost segregation can accelerate depreciation and boost near-term deductions, but it also increases the amount subject to recapture at sale, some of it potentially at ordinary income rates for Section 1245 property. If a sale is on the horizon within five to seven years, it is worth modeling both scenarios with your accountant before committing to a cost segregation study.
Selling a rental at a gain is a milestone worth celebrating, but depreciation recapture can quietly erode a meaningful chunk of your proceeds if you have not planned for it. Our Coral Gables headquartered team works with South Florida landlords and investors every day to model sale scenarios, compare 1031 exchange options, and build a tax strategy that protects what you have built. Schedule a consultation with WAYG today and get clarity on your numbers before you list the property, not after.