Depreciation Recapture Explained

What This Includes

Depreciation recapture refers to the tax owed on the portion of a property sale gain that corresponds to depreciation deductions previously claimed on that property. Under Internal Revenue Code Section 1250, real property depreciation that has been deducted against ordinary income during the ownership period is recaptured on sale as unrecaptured Section 1250 gain, which is taxed at a maximum federal rate of twenty five percent, higher than the zero, fifteen, or twenty percent rates that apply to the remaining long term capital gain.

The logic behind recapture is straightforward. Depreciation deductions reduced the owner's taxable income each year the property was held, effectively giving the owner a tax benefit along the way. When the property is sold for more than its depreciated basis, the government recovers some of that earlier benefit by taxing the recapture portion at a higher rate than ordinary capital gains. For an Albuquerque, NM investor who has owned and depreciated commercial or rental property for many years, the recapture amount can represent a substantial share of the total gain, since the property's basis has been reduced every year by the depreciation taken.

Depreciation recapture is calculated separately from the rest of the capital gain, but both amounts flow from the same sale transaction. The total gain is first determined by subtracting adjusted basis from the amount realized, then the recapture portion, generally equal to the depreciation actually claimed, is carved out and taxed at the higher rate, with any remaining gain taxed at the standard long term capital gains rate. New Mexico does not have a separate recapture rate and instead taxes the full gain, including the recapture portion, as ordinary income under its graduated state brackets.

A 1031 exchange defers depreciation recapture along with the regular capital gain when investment or business use real property is exchanged for other like-kind real property through a Qualified Intermediary. The replacement property generally carries over the relinquished property's adjusted basis, adjusted for any additional investment, which means the recapture liability is postponed rather than eliminated and will resurface if the replacement property is later sold without a further exchange. We help Albuquerque, NM investors calculate their specific recapture exposure and weigh it against the benefits of continuing to defer through an exchange.

What We Deliver

Calculation of total depreciation claimed over the ownership period

Estimate of unrecaptured Section 1250 gain and its federal tax rate

Estimate of New Mexico state tax on the recaptured amount

Separation of recapture exposure from the remaining long term capital gain

Comparison of recapture exposure under a straight sale versus a 1031 exchange

Coordination with a Qualified Intermediary to defer recapture through an exchange

Explanation of how recapture carries into replacement property basis

Coordination with the investor's tax advisor on final reporting

Common Situations

An Albuquerque, NM investor has depreciated a commercial building for over fifteen years and wants to know how much of a future sale will be taxed at the recapture rate.

A property owner in Albuquerque, NM is comparing the after tax proceeds of selling outright against exchanging into a replacement property to keep deferring recapture.

An investor in Albuquerque, NM is planning a series of exchanges over time and wants to understand how recapture liability carries forward with each transaction.

FAQs about Depreciation Recapture Explained

What exactly is depreciation recapture?

It is the tax owed, at a maximum federal rate of twenty five percent, on the portion of your sale gain that equals the depreciation deductions you claimed while owning the property. We help Albuquerque, NM investors calculate this amount before a sale.

Why is depreciation recapture taxed at a higher rate than regular capital gains?

Because depreciation deductions previously reduced your taxable income at ordinary rates, recapture is designed to claw back part of that earlier tax benefit at a rate higher than the standard long term capital gains rate. We help Albuquerque, NM investors understand this mechanic in plain terms.

Does New Mexico tax depreciation recapture differently than the federal government?

No, New Mexico does not have a separate recapture rate. The recaptured amount is included in ordinary taxable income and taxed under the state's graduated brackets along with the rest of the gain. We help Albuquerque, NM investors account for this combined exposure.

Can a 1031 exchange defer depreciation recapture?

Yes. When investment or business use real property is exchanged for other like-kind real property through a Qualified Intermediary, both the capital gain and the depreciation recapture are deferred, though the liability carries forward into the replacement property's basis. We help Albuquerque, NM investors structure exchanges to preserve this deferral.

Does depreciation recapture disappear if the replacement property is exchanged again later?

It continues to be deferred as long as each subsequent transaction is structured as a valid 1031 exchange. Recapture only becomes taxable when a property is eventually sold outside of an exchange. We help Albuquerque, NM investors plan for a series of exchanges if long term deferral is the goal.

How can I estimate my depreciation recapture exposure before selling?

We calculate the total depreciation claimed on the property over your ownership period, apply the maximum twenty five percent federal recapture rate, and add estimated New Mexico state tax on the same amount, giving you a realistic total exposure figure. We help Albuquerque, NM owners run this calculation before listing a property.

Compliance and Limits

Educational content only. Not tax, legal, or investment advice. Depreciation recapture on real property is governed by Internal Revenue Code Section 1250, and deferral through a like-kind exchange is governed by Internal Revenue Code Section 1031. New Mexico taxes recaptured gain as ordinary income under its graduated state brackets. Consult with a Qualified Intermediary and a qualified tax advisor before making a sale or exchange decision.