Depreciation Recapture: The Hidden Tax That Can Wipe Out Your Rental Profit
If you’re a landlord in Washington or Idaho thinking about selling your rental property, you’re probably planning for capital gains tax.
But there’s another IRS hit most landlords never see coming — and it can erase tens of thousands of dollars in profit.
It’s called depreciation recapture, and it’s the hidden tax trap every rental owner needs to understand before selling.
What Is Depreciation Recapture?
When you own a rental, the IRS lets you deduct a portion of the property’s value each year to reflect wear and tear — this is called depreciation.
Those deductions reduce your taxable income, but when you sell, the IRS wants to “recapture” that benefit.
In simple terms, depreciation recapture is the tax you pay on the deductions you took (or should have taken) while owning the property.
Even if you never claimed depreciation, the IRS assumes you did — and you’ll still owe recapture tax when you sell.
How It’s Calculated
You bought a rental for $300,000.
The land is worth $60,000, so the building’s value is $240,000.
You’ve owned it for 10 years and claimed $87,000 in depreciation.
You sell it for $400,000.
You’ll pay capital gains tax on the $100,000 profit and depreciation recapture tax (up to 25%) on the $87,000 of depreciation.
That extra tax can easily equal $20,000–$25,000 — a shock if you weren’t expecting it.
For full IRS guidance, see:
IRS Publication 544 – Sales and Other Dispositions of Assets
Why It Catches Landlords Off Guard
Most landlords remember writing off depreciation each year, but they rarely think about how it affects a future sale.
When you go to sell, your adjusted cost basis is lower because of all those deductions — and that triggers the recapture.
Even if you’ve fully depreciated an older property, the IRS still requires recapture when you sell.
That means a property you’ve owned for decades can create a huge surprise tax bill at retirement.
Ways to Reduce or Avoid Depreciation Recapture
While you can’t make it disappear completely, you can often minimize or defer it with the right strategy:
1. 1031 Exchange
Defer both capital gains and recapture by reinvesting in another property.
You’re not avoiding the tax forever, but you’re keeping your capital working.
2. Seller Financing or Installment Sale
Spread your taxable gain — and recapture — across several years.
You may lower your annual tax bracket while generating passive income.
Reference:
IRS Topic No. 701 – Sale of Your Home (Installment Sales)
3. Convert to Primary Residence (Partially)
If you move in before selling, you may qualify for capital gains exclusions — but recapture still applies to the rental portion.
4. Step-Up in Basis at Death
Passing your property to heirs gives them a stepped-up basis, which can eliminate recapture.
A smart estate-planning move for landlords focused on legacy and family wealth.
5. Use Creative Exit Strategies
Options like lease options, subject-to deals, or contract sales can help control the timing and structure of your sale.
At Easy Landlord Exit, we specialize in creative financing that helps landlords minimize taxes and maximize their return.
(Learn more about creative exits in our free download guide — Landlord Exit Toolkit – WA/ID Edition)
Washington & Idaho Landlords: State Rules to Know
Both states generally follow federal depreciation recapture rules, but there are a few local considerations:
Washington – No state income tax, but you may owe Real Estate Excise Tax (REET) when selling.
Learn more at the WA Department of Revenue REET guide ✅Idaho – Taxes depreciation recapture as ordinary income, which can push you into a higher bracket.
Review details via the Idaho State Tax Commission
Key Takeaways
Depreciation recapture can add up to 25% tax on the depreciation you’ve claimed.
You owe it even if you didn’t take it.
Creative planning can defer or reduce this hit.
Combine tax strategy + exit strategy for the best result.
Ready to Exit Without the Tax Shock?
If you’re a landlord in Washington or Idaho, don’t let depreciation recapture wipe out your profit.
At Easy Landlord Exit, we help landlords exit smoothly and tax-smart with creative financing that protects your bottom line.
👉 Download the Free Landlord Exit Toolkit – WA/ID Edition ✅
Learn your best options before you sell — and keep more of what you’ve earned.