Personal Finance & Estate › Income, gift, estate & real-estate taxes › Real-estate tax rules (depreciation, 1031, property tax)
Depreciation & recapture (27.5 / 39 years)
· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
A yearly write-off of a building's cost over 27.5 years (residential) or 39 years (commercial), partly taxed back at sale.
See it on the Personal Finance & Estate map →How it works
Only the building, not the land, is depreciated, in equal straight-line amounts starting mid-month of purchase. On a $3 million commercial building with $2.4 million allocated to the structure, that is about $61,500 a year of deduction without spending cash. Each dollar lowers your basis. At sale, gain from prior depreciation ('unrecaptured Section 1250 gain') is taxed at up to 25% federal. Trap: the IRS recaptures depreciation 'allowed or allowable', even if you never claimed it.
Why it matters for you
It is why rentals can show tax losses while producing cash, and why selling an old, fully depreciated building can bring a surprisingly large tax bill.
Think of it like
Like a tenant's security deposit: you hold the savings for years, but owe much of it back at sale.
Rules, limits and sources (2026)
The Tax Reform Act of 1986 set 27.5 years; a 1993 law set 39 years for commercial property; the 25% recapture rate dates from 1997. See IRS Publications 527 and 946.
Watch out for
Economists debate whether 39 years matches real building wear, and the land-versus-building split is often disputed with the IRS.
Inside this (1)
Connections (6)
▸Depreciation & recapture (27.5 / 39 years) is the core of Real-estate tax rules (depreciation, 1031, property tax)Law or rule (2026)
How they connect
Depreciation is the engine of real-estate tax planning: it shelters rental cash flow, creates paper losses that the passive rules limit, lowers basis so sale gains grow, and creates the recapture that 1031 exchanges defer and the step-up at death erases. Most other real-estate rules either limit or release it.
When it applies
Depreciation deductions date to the 1909 corporate tax and 1913 income tax; today's schedules came in 1986 and 1993.
The rule
IRC Secs. 167 and 168 allow it; IRS Publication 527 walks rental owners through it on Schedule E.
Watch out for
How much of a purchase price is land, which can't be depreciated, is a judgment call often disputed in audits.
▸Cost segregation & 100% bonus depreciation accelerates Depreciation & recapture (27.5 / 39 years)Standard practice
How they connect
Cost segregation moves parts of a building from 39- or 27.5-year schedules into 5-, 7- and 15-year classes, and bonus depreciation lets those be deducted in year one. That pulls deductions forward, but much of the reclassified amount is recaptured at ordinary rates, up to 37%, rather than 25%, when you sell.
When it applies
Validated by the 1997 Hospital Corporation of America Tax Court case; bonus depreciation began in 2002 and returned to 100% in 2025.
How sure?
IRC Secs. 168(k), 1245 and 1250; the IRS Cost Segregation Audit Techniques Guide describes acceptable studies.
Watch out for
Whether front-loading pays off depends on future tax rates, holding period and a possible 1031 or step-up; advisors weigh it case by case.
▸Depreciation & recapture (27.5 / 39 years) adds an up-to-25% layer to Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
When you sell, the part of the gain that came from depreciation, 'unrecaptured Section 1250 gain', is taxed at your ordinary rate but no more than 25%, while the rest gets 0/15/20%. For high earners that's 28.8% with NIIT on recapture versus 23.8% on appreciation, plus California's 13.3% on all of it.
When it applies
Congress set the 25% maximum rate for real-estate depreciation in the 1997 Taxpayer Relief Act.
The rule
IRC Sec. 1(h)(1)(E) and 1(h)(6); the 'Unrecaptured Section 1250 Gain Worksheet' in the Schedule D instructions.
Watch out for
Planners debate whether depreciation's yearly savings outweigh later recapture; for owners who hold until death, the step-up usually settles it.
▸Step-up in basis at death wipes out Depreciation & recapture (27.5 / 39 years)Law or rule (2026)
How they connect
Recapture bites only when you sell. At death, basis resets to market value, so years of depreciation are never taxed back. Heirs also restart depreciation on the new, higher building value, sheltering rent again. That makes holding a fully depreciated building until death far cheaper than selling it late in life.
When it applies
Applies whenever depreciated property passes through an estate, under the 1921 step-up and later recapture rules.
The rule
IRC Sec. 1014, with Secs. 1245(b)(2) and 1250(d)(2) exempting transfers at death from recapture.
Watch out for
Proposals to tax gains at death would end this; less known, suspended passive losses are partly lost at death.
▸Passive-loss rules & real estate professional status can suspend losses from Depreciation & recapture (27.5 / 39 years)Law or rule (2026)
How they connect
Depreciation often turns rental profit into a tax loss. If the passive rules block that loss, it is suspended and carried forward. When you finally sell in a taxable sale, all suspended losses are released, offsetting recapture and gain. A 1031 doesn't release them, and at death they're allowed only beyond the step-up.
When it applies
In place since 1986; matters most for owners with income above $150,000, where the $25,000 allowance is fully phased out.
The rule
IRC Sec. 469(b) carryforwards and 469(g) dispositions; IRS Form 8582 tracks suspended losses year to year.
Watch out for
Tracking suspended losses over decades is a practical problem; owners often discover missing records only at sale, so keep every Form 8582.
▸Real estate vs. stocks (illiquid vs. liquid wealth) favors real estate via Depreciation & recapture (27.5 / 39 years)Standard practice
How they connect
Direct owners deduct a building's cost over 27.5 years (residential) or 39 (commercial), sheltering rental income, a tax edge stocks lack. On sale, that depreciation is recaptured at up to 25%, unless deferred by a 1031 exchange or erased by the step-up in basis at death.
When it applies
The 27.5-year residential life dates from 1986 and the 39-year commercial life from 1993; recapture applies to every sale of depreciated property.
How sure?
IRC Secs. 167, 168 and 1250; Form 4797 reports recapture on sale.
Watch out for
Whether this tax edge outweighs real estate's illiquidity and concentration is the core of the debate.