Short answer
Depreciation is deducted now and accounted for later. When you sell a property, the gain attributable to depreciation you claimed is taxed, and cost segregation changes how. Depreciation on the 5-, 7- and 15-year property a study identifies is section 1245 recapture, taxed as ordinary income at your regular rate. Depreciation on the building itself is unrecaptured section 1250 gain, taxed at a maximum of 25 percent. A study therefore moves part of the eventual tax from the 25 percent bucket into the ordinary-income bucket, in exchange for deducting that depreciation years earlier. Whether that trade is good depends on how long you hold, what you do with the deferred tax in the meantime, and what happens at sale. This article explains the mechanics so the trade is visible before you commission a study. It is general education, not tax advice.
Two kinds of depreciable property, two kinds of recapture
| Property | Examples after a study | Depreciation method | Treatment of depreciation-related gain on sale |
|---|---|---|---|
| Section 1245 property | Appliances, carpeting, furniture, equipment serving a business function, and generally the 15-year land improvements a study identifies | Accelerated, often with bonus depreciation | Ordinary income to the extent of depreciation allowed or allowable, including bonus depreciation and section 179 amounts |
| Section 1250 property | The building: structure, roof, general building systems | Straight line over 27.5 or 39 years | Additional depreciation is generally none for straight-line real property, so the depreciation-related gain is unrecaptured section 1250 gain, taxed at a maximum rate of 25 percent |
The classification of land improvements is a matter for the study's legal analysis; the point for this article is that depreciation on property outside the building class is generally recaptured at ordinary rates.
Two further rules shape the result. Basis is reduced by depreciation allowed or allowable, so depreciation you could have claimed reduces basis whether or not you claimed it. And section 1245 recapture income cannot be reported under the installment method; it is recognized in the year of sale even if you are paid over several years.
A worked illustration
Suppose an owner buys a small apartment building and, after separating land, has a depreciable basis. Without a study, the entire basis is 27.5-year property. With a study, some of it is identified as 5-year and 15-year property.
- Without a study, all depreciation is straight-line on the building. On sale, the gain attributable to that depreciation is unrecaptured section 1250 gain, taxed at up to 25 percent.
- With a study, the 5- and 15-year components are depreciated faster and possibly expensed in year one under bonus depreciation. Deductions arrive early. On sale, the gain attributable to that depreciation is section 1245 recapture at ordinary rates, which may be higher than 25 percent for the owner. The building's depreciation is still unrecaptured section 1250 gain at up to 25 percent.
Numbers are left out deliberately; they depend on the owner's rate, the holding period, the property's makeup and the sale price, and any figure printed here would be wrong for you. The shape is what matters: earlier deductions, some of which are taxed later at a higher rate.
Why the trade can still be worth it
- Time value. A deduction taken now is worth more than the same deduction taken over 27.5 years, if it reduces tax you would otherwise pay this year. The deferred tax can be reinvested.
- Rate arbitrage in your favor, sometimes. If the deduction offsets income taxed at a high rate now and the recapture lands in a year with a lower rate, the trade improves. The reverse is also possible.
- Holding period. The longer you hold, the more the early deductions compound before recapture. A sale within a few years can turn the trade negative once the study's cost is included.
- Disposition planning. A like-kind exchange of real property under section 1031 can defer gain, subject to its rules, and some owners hold until death, when basis rules change. These are planning decisions for your adviser, not features of the study.
Why the trade can go wrong
- Passive losses you cannot use. If the early deductions are suspended by the passive activity rules, you get the recapture later without having used the deduction earlier. The trade is negative until the suspended losses are released.
- A quick sale. Recapture arrives before the timing benefit has compounded.
- Installment sales. Section 1245 recapture is recognized in full in the year of sale, whatever you actually collected. Owners who plan a seller-financed sale around a study are often surprised.
- Ignoring allowed or allowable. Skipping depreciation to avoid recapture does not work; basis is reduced anyway.
- State differences. States may tax recapture differently or not follow federal bonus depreciation, producing a separate calculation.
Where it is reported
Sales of business and rental property are reported on Form 4797, Sales of Business Property, which is where the section 1245 and section 1250 computations are made asset by asset. The study's asset list is what makes that possible: each reclassified component has its own basis, its own accumulated depreciation and its own recapture, and the building has its own. An owner who sold without a study reports one asset; an owner who sold after a study reports several. The unrecaptured section 1250 gain then flows to the Schedule D worksheet, where the 25 percent maximum rate is applied. Your adviser prepares these forms; your job is to keep the study and the depreciation schedules that feed them.
Partial dispositions and replacements
When a component identified in a study is later replaced, the study's asset list lets your adviser treat the old component as disposed and deduct its remaining basis rather than continuing to depreciate a roof that no longer exists. That is one of the quieter benefits of a study with a proper asset list and one more reason to keep the study with the tax records for as long as you own the property. The rules for partial dispositions are technical and are the adviser's territory.
What to ask before commissioning a study
- What is my marginal ordinary rate now, and what do I expect at sale?
- Can I use the accelerated deductions this year under the passive activity rules, or will they be suspended?
- How long do I expect to hold, and how do I expect to dispose of the property?
- If I sell on an installment basis, what does immediate recognition of section 1245 recapture do to my cash?
- Does my state follow the federal rules?
- After the study's fee, what is the expected net benefit under a realistic holding period?
A practitioner who cannot have this conversation, or who answers with a percentage, is selling a study rather than advising on one. The study describes what the evidence supports; the trade is yours and your adviser's to weigh.
What people ask on Reddit and other forums
The searches that lead people to these threads are usually phrased "depreciation recapture cost segregation".
Recapture is the part of the "cost segregation reddit" threads on r/realestateinvesting where the enthusiasm cools. The recurring questions, from the sources below:
"So I just pay it all back when I sell?" Not "back": depreciation on the reclassified property is recaptured as ordinary income, and the building's depreciation is unrecaptured section 1250 gain at up to 25 percent. What you keep is the time value of deducting earlier, and whether that beats the higher rate depends on your holding period and rates.
"If I don't claim the depreciation, do I avoid recapture?" No. Basis is reduced by depreciation allowed or allowable, so skipping it only loses the deduction.
"Seller financing to spread it out?" Section 1245 recapture is recognized in full in the year of sale regardless of payments received. Installment treatment does not defer it.
"Does a 1031 fix it?" A qualifying like-kind exchange of real property can defer gain subject to its rules; the treatment of the personal property a study identified is a technical question for your adviser.
Questions people also ask
Does cost segregation increase the tax I pay when I sell?
It changes the character of part of the depreciation-related gain from unrecaptured section 1250 gain, taxed at up to 25 percent, to section 1245 recapture, taxed as ordinary income. Whether your total tax over the holding period rises or falls depends on the timing benefit you received in the meantime.
Can I avoid recapture by not claiming the depreciation?
No. Basis is reduced by depreciation allowed or allowable. Unclaimed depreciation still reduces basis, and the recapture rules apply to the allowable amount.
Does recapture apply if I do a 1031 exchange?
A qualifying like-kind exchange of real property can defer gain, including the depreciation-related portion, subject to the exchange rules. The treatment of personal property identified in a study inside an exchange is a technical question for your adviser.
Is recapture the same for a short-term rental?
The recapture rules turn on the property's classification and depreciation, not on the rental term. A short-term rental may be nonresidential real property with a 39-year building period, which changes the building's depreciation but not the character rules described here.
Is the 25 percent rate a flat rate?
It is a maximum rate for unrecaptured section 1250 gain for individuals; taxpayers in lower brackets may pay less. Section 1245 recapture is taxed at ordinary rates.
Sources
- https://www.irs.gov/publications/p544 — IRS Publication 544 (2025), Sales and Other Dispositions of Assets: Chapter 1 (like-kind exchanges), Chapter 3 (section 1245 and section 1250 property) and Chapter 4 (unrecaptured section 1250 gain).
- https://www.law.cornell.edu/uscode/text/26/1245 — 26 U.S.C. §1245(a)(1).
- https://www.law.cornell.edu/uscode/text/26/1250 — 26 U.S.C. §1250(a) and (b).
- https://www.law.cornell.edu/uscode/text/26/1016 — 26 U.S.C. §1016(a)(2).
- https://www.irs.gov/publications/p537 — IRS Publication 537 (2025), Installment Sales: Depreciation Recapture Income.
- https://www.irs.gov/publications/p527 — IRS Publication 527 (2025), Residential Rental Property: Chapter 2, Depreciation of Rental Property.