Does every depreciation dollar create ordinary income?
No. Buildings and shorter-lived components can receive different treatment. Reconcile the depreciation schedule and sale allocation before calculating tax.
Depreciation Recapture Explained for Rental Property
Understand why prior depreciation affects the tax model when depreciated real estate is sold.
Reviewed by Jeff Huang, CPA, MBA · Last reviewed October 9, 2026 · Sources checked October 10, 2026Depreciation generally reduces a rental property’s adjusted tax basis. When the property is sold, part of the gain may be attributable to prior depreciation and may receive different federal tax treatment from the remaining long-term capital gain. California treatment and the taxpayer’s full return also need to be modeled.
Separate the gain into the right categories
Depreciation-related gain is not always taxed the same way. Section 1245 components can create ordinary-income recapture. Depreciated buildings may create unrecaptured section 1250 gain. The sale allocation and prior deductions determine which rules apply.
IRS Publication 544 — depreciation and gain categoriesFacts that can change the answer
- Depreciation allowed or allowable
- Land and building allocations
- Cost-segregation components
- Prior improvements and dispositions
- Sale allocation and transaction costs
- Federal and California income profile
A simple planning example
A rental building has $600,000 of original basis and $150,000 of accumulated depreciation, with no other adjustments. Its adjusted basis is $450,000. Before estimating sale tax, the CPA checks the land allocation, selling costs, improvements, and any separately depreciated components. The loan balance is used in the cash-flow calculation.
Illustration only. This is not a tax calculation and does not reflect any taxpayer’s complete facts.
Frequently asked questions
What if I did not claim depreciation?
Basis can still be reduced by depreciation that was allowable. Review the prior returns and available correction procedures instead of assuming the omitted deduction disappears.
Prepare before the decision is final
Provide depreciation schedules for the building, improvements, and any cost-segregation components, plus the proposed sale allocation. Ask the CPA to separate gain categories before estimating after-tax proceeds.
The intro call confirms fit, timing, and scope. Detailed calculations and recommendations require a paid engagement. Use TaxDome when the team requests sensitive records.
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