Full Definition
When investment real estate is sold, the IRS 'recaptures' depreciation previously claimed. Depreciation recapture is taxed at a maximum 25% federal rate — higher than long-term capital gains rates. This is a major reason 1031 exchanges are attractive — they defer depreciation recapture along with capital gains.
Related Terms
Capital Gains Tax
Federal tax on the profit from selling an investment asset. Long-term rate is 0-20% plus 3.8% NIIT for most real estate investors.
1031 Exchange (Like-Kind Exchange)
IRS-approved strategy allowing investors to defer capital gains taxes by reinvesting proceeds from sold investment property into like-kind property.
Depreciation
Tax deduction allowing investors to write off the cost of an income-producing building over its useful life — 39 years for commercial, 27.5 for residential.