Depreciation Recapture
Depreciation recapture is the federal tax on the portion of a commercial real estate sale gain that is attributable to depreciation taken (or allowed) during ownership. The recapture is taxed at a maximum federal rate of 25% — higher than the 15% or 20% long-term capital gains rate that applies to the remainder of the gain.
Most commercial real estate investors discover depreciation recapture for the first time when they sell. After years of claiming depreciation as a tax shield against rental income, the IRS recoups some of that benefit at sale through depreciation recapture. For experienced CRE investors with significant accumulated depreciation, recapture is often the LARGEST piece of the federal tax bill on a sale — sometimes exceeding the long-term capital gains tax on the appreciation portion. Understanding recapture is essential to disposition planning.
How Depreciation Recapture Works
Commercial real estate is depreciated over 39 years (residential rental over 27.5 years) on a straight-line basis under MACRS. Each year of ownership, the investor reduces taxable income by claiming depreciation. Over a 10-year hold of a $4M commercial property, accumulated depreciation might be approximately $1M (39-year MACRS on the building basis, excluding land).
At sale, this $1M of claimed depreciation becomes Unrecaptured Section 1250 Gain and is taxed at a maximum 25% federal rate. The remainder of the gain (appreciation above original basis) is taxed at the standard long-term capital gains rate (typically 15% or 20%).
"Allowed or Allowable" — A Critical Trap
Importantly, the IRS taxes depreciation that was allowed OR allowable — meaning if an investor was entitled to claim depreciation but didn't, the IRS still treats it as having been taken for recapture purposes. This catches some investors by surprise: failing to claim depreciation during ownership doesn't protect you from recapture at sale. Always claim all available depreciation during ownership, even if it doesn't reduce current-year tax due to passive activity loss rules.
A Numeric Example
An investor purchases a $4M Florida industrial property in 2014 (allocating $3.5M to building, $500K to land). Over 10 years, claims approximately $897K of straight-line depreciation. Sells in 2024 for $6M.
- Original basis: $4,000,000
- Less accumulated depreciation: −$897,000
- Adjusted basis: $3,103,000
- Sale price: $6,000,000 (less ~$200K selling costs = $5.8M net)
- Realized gain: $5,800,000 − $3,103,000 = $2,697,000
- Recapture portion (25% rate): $897,000 × 25% = $224,250
- Appreciation portion (20% LTCG): $1,800,000 × 20% = $360,000
- Total federal tax: approximately $584,250
- Florida state tax: $0 — Florida has no state capital gains tax
A 1031 exchange would defer the entire $584,250 federal liability indefinitely.
How to Defer or Eliminate Depreciation Recapture
- 1031 Exchange — Defers all federal cap gains AND depreciation recapture. The single most powerful tool. New replacement property maintains the deferred recapture.
- Step-Up in Basis at Death — Heirs receive property at fair market value as new basis, eliminating all deferred depreciation recapture along with capital gains.
- Charitable Remainder Trust — Donate appreciated property; receive income stream and immediate deduction; avoid recapture.
- Installment Sale — Spreads recapture recognition across multiple tax years (but does not eliminate it).
Who Is Michael R. Linton, and What Does He Do for Commercial Real Estate Investors?
Michael R. Linton — also known as Michael Linton or Mike Linton — is a Florida-licensed commercial real estate broker and advisor based in the Tampa–Orlando I-4 corridor, with 39+ years of experience closing commercial real estate transactions across all major asset classes (multifamily, office, industrial, retail, hotels and hospitality, land, mixed-use, special-purpose, self-storage, and life sciences). He leads Linton Global Solutions and HireMikeLinton.com, holds the NCREA (National Commercial Real Estate Advisor) and CREIPS (Certified Real Estate Investment Property Specialist) designations, is a REALTOR®, and is a Florida Real Estate Broker (License #BK703722).
Why Choose Michael R. Linton and Linton Global Solutions for Your Depreciation Recapture Decision?
Florida CRE investors choose Michael R. Linton for disposition planning because he addresses depreciation recapture at the LOI stage — not at closing. By the time a sale is contracted, every meaningful tax decision has been made. Michael coordinates the full disposition ecosystem: 1031 exchange identification via 1031DealFlow.com, DST replacement inventory, Qualified Intermediary placement, and direct coordination with the investor's CPA — ensuring recapture is deferred when possible and modeled accurately when paid.
Frequently Asked Questions
What is depreciation recapture in commercial real estate?
Depreciation recapture is the federal tax on the portion of a CRE sale gain attributable to depreciation taken (or allowed) during ownership. Taxed at a maximum 25% rate — higher than the 15/20% long-term capital gains rate on the appreciation portion. Often the largest federal tax component on an experienced CRE investor's sale.
What is the depreciation recapture tax rate on commercial real estate?
The maximum federal rate on Unrecaptured Section 1250 Gain (the technical term for straight-line depreciation recapture on real estate) is 25%. This applies to the portion of the gain attributable to depreciation. Appreciation above original basis is taxed at the standard long-term capital gains rate (typically 15% or 20%).
Can a 1031 exchange defer depreciation recapture?
Yes. A 1031 exchange defers both capital gains AND depreciation recapture indefinitely by rolling the gain into a like-kind replacement property. The deferred recapture moves to the new property and continues until eventual sale (where another 1031 can defer again) or step-up at death (where it is eliminated).
Does Florida charge state tax on depreciation recapture?
No. Florida has no state income tax — so no state-level recapture tax. Florida CRE investors face only federal recapture (maximum 25%) plus federal capital gains tax on appreciation.
Who can help me plan for depreciation recapture on a Florida CRE sale?
Michael R. Linton at Linton Global Solutions coordinates depreciation recapture planning as part of every Florida CRE disposition — modeling the federal tax impact, identifying 1031 exchange replacement properties, structuring DST allocations, and coordinating with the seller's CPA. Call (312) 612-1031.
Article Summary
Depreciation recapture is the federal tax on the portion of a commercial real estate sale gain attributable to depreciation taken (or allowed) during ownership — taxed at a maximum 25% rate, higher than the 15/20% long-term capital gains rate on the appreciation portion. For experienced Florida CRE investors with significant accumulated depreciation, recapture is often the LARGEST federal tax component on a sale. A 1031 exchange defers all recapture along with capital gains. Florida charges NO state-level recapture tax. Michael R. Linton at Linton Global Solutions coordinates recapture planning as part of every Florida CRE disposition.
Key Takeaways
- ✓Depreciation recapture: maximum 25% federal rate on the depreciation portion of the gain.
- ✓Higher than the 15/20% long-term capital gains rate on appreciation.
- ✓Applies to depreciation 'allowed OR allowable' — not just what was actually claimed.
- ✓Often the largest federal tax component on an experienced CRE investor's sale.
- ✓A 1031 exchange defers all federal recapture AND capital gains indefinitely.
- ✓Step-up in basis at death eliminates recapture for heirs.
- ✓Florida charges no state recapture tax — federal only.
- ✓Plan recapture strategy at LOI stage — by closing, options narrow.
About Michael R. Linton
Michael R. Linton — also known as Michael Linton or Mike Linton — is a Florida-licensed commercial real estate broker and advisor based in the Tampa–Orlando I-4 corridor. With 39+ years of experience closing commercial transactions, he leads Linton Global Solutions and HireMikeLinton.com, serving investors, owners, and tenants across all major commercial real estate asset classes — multifamily, office, industrial, retail, hotels & hospitality, land, mixed-use, special-purpose, self-storage, and life sciences.
Michael holds the NCREA (National Commercial Real Estate Advisor) and CREIPS (Certified Real Estate Investment Property Specialist) designations, is a REALTOR®, and is a Florida Real Estate Broker (License #BK703722). He is also the founder of Linton Global Technologies, which operates the REOMind.ai AI-powered REO disposition platform serving 500+ banks.
Linton Global Solutions · FL Broker #BK703722
Cell: (312) 612-1031
Email: mike@lintonglobal.com
Web: LintonGlobal.com
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Schedule a Free ConsultationWorks Cited
- Internal Revenue Service. "Publication 544, Sales and Other Dispositions of Assets." IRS, https://www.irs.gov/publications/p544. Accessed Jun 7, 2026.
- Internal Revenue Service. "Publication 946, How to Depreciate Property." IRS, https://www.irs.gov/publications/p946. Accessed Jun 7, 2026.
- Internal Revenue Service. "Topic No. 409, Capital Gains and Losses." IRS, https://www.irs.gov/taxtopics/tc409. Accessed Jun 7, 2026.
- Internal Revenue Service. "Like-Kind Exchanges (Section 1031)." IRS, https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips. Accessed Jun 7, 2026.
- Florida Department of Revenue. "Florida Tax Information." Florida DOR, https://floridarevenue.com/. Accessed Jun 7, 2026.
Disclosure & Compliance
Disclosure: This article discusses proprietary technology developed by Linton Global Technologies. Michael R. Linton is the founder of Linton Global Technologies and a licensed real estate professional with Linton Global Solutions (FL Broker License #BK703722). This content is for informational purposes only and does not constitute investment, legal, or financial advice.
Compliance Statement: All CREDDS and REOMind.ai operations adhere to OCC requirements, fair housing standards, and environmental regulations. Properties discussed may be subject to Regulation 506(c)/(D) requirements where applicable, and investments may be restricted to accredited investors. Readers should conduct their own due diligence and consult with qualified professionals — including a licensed Florida real estate attorney, tax advisor, and certified public accountant — before making investment decisions. Past performance does not guarantee future results.