From the Wyo Stays team — a licensed Wyoming brokerage. Educational information, not tax advice. Confirm with your CPA.
Depreciation is one of the best things about owning a rental — you deduct the building's wear each year, reducing taxable income. But there's a catch on the back end, and it surprises owners at sale time if they don't see it coming: depreciation recapture.
The simple version: the depreciation you claimed over the years isn't free forever. When you sell, the IRS "recaptures" some of that benefit — the portion of your gain attributable to depreciation is taxed (often at a rate up to 25% for the recaptured amount), separately from regular capital gains.
Why it matters: - It means your real tax bill at sale is bigger than a naive "sale price minus purchase price" calculation suggests. - Strategies like cost segregation front-load depreciation (great for cash flow now) but also increase what could be recaptured later — a trade-off worth understanding, not fearing.
How owners plan for it: - 1031 exchange — roll the gain into the next property and defer the tax (see the 1031 Primer). - Timing and offsets — coordinate the sale year with your CPA. - Just knowing — so the number at closing isn't a shock.
Recapture isn't a reason to skip depreciation — the time-value of deducting now almost always wins. It's a reason to plan your exit with your CPA before you sell, not after.
→ Read The STR Tax Advantage Guide, or explore Selling a Performing STR in Scaling & Exit.