How to Calculate STR Depreciation Recapture When You Sell a Short-Term Rental Property

You just listed your Smoky Mountain cabin for sale. The deal looks great on paper: you bought it for $400,000, it is worth $550,000 today, and you have been writing off big depreciation losses for three years. Then your CPA calls with a number you did not expect.

That number is depreciation recapture. It is not a penalty. It is the IRS collecting on deductions you already took. But it can easily run into five figures, and if you never modeled it, the surprise stings.

TL;DR: When you sell a short-term rental, the depreciation you claimed does not disappear. The IRS recaptures it at sale in two forms: §1245 ordinary-income recapture on bonus-depreciated personal property (furniture, appliances, land improvements), and §1250 unrecaptured gain on the building itself taxed at a maximum 25% rate. Calculate your adjusted basis, identify how much of each type you claimed, and you can predict your recapture bill before you ever list the property.

Jennifer Beadles is a real estate investor and short-term rental owner who uses the STR loophole on her own properties. She writes from hands-on operating experience plus current IRS guidance (IRC §469 and Treas. Reg. §1.469-1T(e)(3)(ii)(A)).

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What Is Depreciation Recapture on a Short-Term Rental?

Depreciation recapture is the mechanism under IRC §1245 and IRC §1250 that taxes you when you sell a depreciable asset for more than its adjusted (depreciated) basis. Every year you owned the rental and claimed depreciation, you reduced your tax basis. When you sell, the IRS looks at the gap between what you sold it for and that reduced basis, and taxes a portion of that gain at elevated rates.

There are two distinct buckets, and mixing them up is where most owners get confused.

Bucket 1: §1245 recapture. This applies to personal property: the 5-year components (appliances, furniture, carpeting) and 7-year components (certain equipment) that a cost segregation study carved out of the building, plus 15-year land improvements (driveways, landscaping, fencing). If you claimed bonus depreciation on these, every dollar you deducted gets recaptured as ordinary income in the year of sale. Your marginal rate applies, not a preferential capital-gains rate.

Bucket 2: §1250 unrecaptured gain. This applies to the building itself (27.5-year residential real property under MACRS). The straight-line depreciation you claimed on the structure does not convert to ordinary income, but it is taxed at a maximum rate of 25% under IRC §1(h)(1)(D). This is called "unrecaptured §1250 gain," and it is a separate line on your Schedule D.

Any remaining gain above your original purchase price is long-term capital gain, taxed at 0%, 15%, or 20% depending on your income.

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The Three Tax Layers on a Rental Sale

Before doing the math, it helps to see all three layers stacked:

Most STR owners who ran a cost segregation study in year one are sitting on a large §1245 recapture balance. That is the bucket that hurts the most at an ordinary-income rate.

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How to Calculate STR Depreciation Recapture: A Step-by-Step Worked Example

Let's put real numbers on this. The math is not hard once you organize the pieces.

Assumptions

• Purchase price: $500,000 (land value $75,000, depreciable building basis $350,000, personal property from cost seg $75,000)
• Sale price: $650,000
• Owned for 4 years
• Selling costs (commissions, closing): $32,500
• Owner is in the 32% federal income bracket
• Long-term capital gains rate: 15%

Step 1: Calculate Adjusted Basis at Sale

Start with your original depreciable basis and subtract every dollar of depreciation you claimed.

Building (27.5-year straight-line): Annual depreciation = $350,000 / 27.5 = $12,727/year Over 4 years: $12,727 x 4 = $50,909 claimed

Personal property (cost seg components, 5/7/15-year): $75,000 claimed in year one via 100% bonus depreciation

Total depreciation claimed: $50,909 + $75,000 = $125,909

Adjusted basis at sale: Original total basis (purchase price including land) = $500,000 Less total depreciation claimed = $125,909 Adjusted basis = $374,091

Note: land ($75,000) is not depreciated, so it stays in your basis throughout. The depreciation reduces only the building and personal property portions.

Step 2: Calculate Total Realized Gain

Net sale proceeds = $650,000 sale price minus $32,500 selling costs = $617,500

Total realized gain = $617,500 net proceeds minus $374,091 adjusted basis = $243,409

Step 3: Allocate the Gain Into Its Three Buckets

§1245 recapture first (it comes off the top): All depreciation claimed on personal property and land improvements: $75,000 That full $75,000 is §1245 recapture, taxed as ordinary income.

§1250 unrecaptured gain next: Straight-line depreciation claimed on the building: $50,909 That full $50,909 is §1250 unrecaptured gain, taxed at max 25%.

Remaining gain is long-term capital gain: $243,409 total gain minus $75,000 §1245 minus $50,909 §1250 = $117,500 long-term capital gain

Step 4: Calculate the Tax on Each Layer

So on a deal that produced a $243,409 gain, you owe roughly $54,352 in federal tax. The §1245 recapture alone accounts for $24,000 of that. If you never modeled this, it lands like a gut punch.

One more thing worth noting: this example ignores state income tax, the 3.8% Net Investment Income Tax that can apply to high earners under IRC §1411, and any depreciation suspended in passive-loss carryforwards that release at sale. Your actual CPA will layer those on top.

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Why the STR Loophole Front-Loads the Recapture Problem

The STR loophole is powerful precisely because it lets you take those losses in early years against your W-2 income. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), a rental with an average guest stay of 7 days or less is not a passive rental activity. Pair that with material participation (commonly the 100-hours-and-more-than-anyone-else test under Treas. Reg. §1.469-5T), and those paper losses offset ordinary income dollar for dollar. You do not need real estate professional status, and you do not need 750 hours.

But here is the tradeoff nobody likes to talk about: the same cost segregation study that gave you a $75,000 year-one deduction is sitting in a recapture account waiting for you at sale. The deduction was real. The recapture is real too.

For a deeper look at the interplay between cost segregation and the STR loophole's loss strategy, the cost segregation and the STR loophole guide covers that pairing in full. The general mechanics of what happens to your STR tax position at sale are covered in how the STR loophole works when you eventually sell the rental property. This article focuses specifically on calculating the recapture numbers so you know what you are walking into.

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Three Levers That Change the Recapture Math

1. How Long You Held the Property

A cost seg study on a $75,000 personal-property pool taken in year one means you carry a $75,000 §1245 recapture balance from day one. Holding longer does not reduce it. The building's §1250 balance does grow over time because you keep claiming straight-line depreciation each year, but the personal-property recapture is already crystallized.

2. Your Tax Bracket in the Year of Sale

§1245 recapture hits at your ordinary-income rate. If you sell in a year when your income is lower (say, you left a high-income job), the same recapture bill costs you less. Timing matters.

3. Whether You Do a 1031 Exchange

A properly structured 1031 exchange under IRC §1031 defers the entire gain AND the recapture by rolling your adjusted basis into the replacement property. You do not pay today. But the deferred recapture follows the new property until you eventually sell without exchanging. The post can you pair the STR loophole with a 1031 exchange on the same property walks through whether that combination makes sense for STR owners specifically.

Honestly, for most people who used aggressive bonus depreciation in year one, a 1031 exchange is usually the better move if they want to keep real estate exposure. Paying $24,000 in ordinary-income tax to cash out of a deal you plan to reinvest anyway rarely makes sense.

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Key Takeaways

• §1245 recapture applies to every dollar of bonus depreciation you claimed on personal property and land improvements. It is taxed as ordinary income, not at capital gains rates.
• §1250 unrecaptured gain applies to straight-line depreciation on the building itself. It is capped at 25%, not your full ordinary rate.
• Long-term appreciation above your original purchase price is taxed at preferential capital-gains rates.
• A cost segregation study creates large §1245 balances that do not shrink with time. Know this before you sell.
• A 1031 exchange defers all three layers, including recapture.
• The Net Investment Income Tax (3.8% under IRC §1411) may apply to high earners on top of the above. Check with your CPA.

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Running Your Own Numbers

The worked example above uses a clean set of assumptions, but your property has its own basis, its own cost-seg allocations, and its own selling costs. Pull your depreciation schedules (Form 4562 from each prior year return), separate the personal-property pool from the building pool, and add up the cumulative amounts. That is your recapture balance.

You can also run the numbers in our cost segregation calculator to see how front-loaded depreciation affects both your year-one savings and your eventual recapture exposure.

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Sources

• IRC §1245 (Gain from Dispositions of Certain Depreciable Property)
• IRC §1250 (Gain from Dispositions of Certain Depreciable Realty)
• IRC §1(h) (Maximum Capital Gains Rate)
• IRC §1031 (Like-Kind Exchanges)
• IRC §1411 (Net Investment Income Tax)
• IRC §168 (MACRS and Bonus Depreciation)
• IRS Publication 527, Residential Rental Property
• IRS Topic No. 703, Basis of Assets
• Treas. Reg. §1.469-1T(e)(3)(ii)(A)

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This article is for educational purposes only and is not tax or legal advice. Talk to a CPA who knows short-term rentals before you act on it.