VaultSTRThe honest frame
Every aggressive year-one deduction — cost segregation, bonus depreciation — is a deferral, not a gift. When you sell, the IRS settles up. Investors who understand recapture before they buy make better exit decisions; investors who discover it at closing feel robbed. This is the article to read before the study, not after the sale.
The two flavors of recapture
Building depreciation (Section 1250): the straight-line depreciation you took on the structure is taxed at your ordinary rate, capped at 25% — “unrecaptured 1250 gain.” Personal property (Section 1245): the 5- and 7-year components a cost-seg study identified, plus furnishings, recapture at full ordinary rates with no cap, to the extent of gain on those components. 15-year land improvements largely follow 1250 treatment.
Rough shape: sell a property after taking $150,000 of accelerated deductions and $30,000 of building depreciation, and the exit tax bill on recapture alone can run $45,000–$60,000 depending on your bracket — on top of capital gains on the appreciation.
Worked example
Buy at $650,000, take $185,000 of year-one accelerated depreciation at a 35% rate (about $65,000 deferred), sell three years later at $780,000. At sale: the accelerated portion recaptures at ordinary rates, the building’s straight-line at up to 25%, and the $130,000 appreciation at long-term capital gains. Net effect over the hold: you had use of ~$65,000 interest-free for three years, and returned a large share at exit. That’s still valuable — deferral is a real yield — but it’s a loan, and pricing it as free money is how short holds go wrong.
Four ways to manage the bill
1031 exchange. Roll into a like-kind property and both gain and recapture defer — the standard move for serial acquirers; basis carries over, and the clock resets only at death. Hold long. The longer the deferral runs, the more the time-value works for you; recapture on a 15-year hold is a footnote, on a 2-year flip it’s the story. Die with it — bluntly: heirs receive a stepped-up basis and the deferred tax evaporates under current law. Estate planning, not tax evasion. Time the sale against low-income years, and model installment sales carefully — recapture on 1245 property is generally due in the year of sale even on installment terms, a trap worth flagging to your CPA.
When cost segregation still wins anyway
Recapture is not an argument against acceleration — it’s an argument for modeling the exit. If you’ll hold 5+ years, reinvest via 1031, or use the deferred cash to acquire more cash-flowing property, acceleration usually wins decisively. If you’re likely to sell inside three years with no exchange, run both scenarios before paying for the study. The pro forma builder models your five-year hold and exit so the conversation with your CPA starts from real numbers.
Put this to work
Three ways to move from reading to doing: browse today’s underwritten deals and get three more in your inbox every morning via the Daily Deal newsletter below; run your own numbers in the free pro forma builder or revenue calculator (unlocking the full report creates your free VaultSTR account); or tell our desk what you’re looking for and we’ll point you to a vetted agent and the right tools for your situation.
Bottom line
Depreciation recapture is the other half of every acceleration strategy. Deferral has real value — just price the exit into the decision, and let the hold period, not the year-one refund, drive whether you accelerate.
This article is research, not tax or legal advice. Thresholds, elections, and documentation requirements depend on individual facts — involve a CPA who works with short-term rentals before acting on any of it.