Depreciation Recapture
Depreciation recapture is the tax the IRS collects, at sale, on the depreciation deductions an investment-property owner took during the holding period. For real estate it's taxed at up to 25% — separate from and on top of capital gains — and it applies even if the owner never actually claimed the deductions they were entitled to.
Why it exists, and why it stings
Depreciation shelters rental income each year by treating the building as wearing out, and every dollar of it lowers the owner's cost basis. At sale, that sheltered amount comes due. On a rental held 20 years, recapture alone can rival the capital gains bill — which is why a long-tenure landlord's "I'd sell but the taxes would kill me" is usually about recapture as much as gains.
The 1031 connection
A properly executed 1031 exchange defers recapture along with capital gains — the deferral rides on the exchange as a package. That's the door-opener with tired landlords: the tax bill they're dreading isn't triggered if they exchange instead of cash out. (The basis carries over, so the bill is deferred, not erased — and heirs may receive a stepped-up basis, which is the estate-planning wrinkle their CPA should walk them through.)
The prospecting read
County records already show tenure; the longer the hold, the larger both the equity and the accumulated depreciation — and the stronger the lock-in this term explains. Definition, not tax advice.