Selling an Airbnb: depreciation recapture, the 25% maximum rate and your suspended losses

What is depreciation recapture on a rental property?

Every dollar of depreciation lowers your adjusted basis. When you sell, gain is the amount realized minus that lower basis, so depreciation shows up again as gain. "Recapture" is the set of rules that decides how that part of the gain is taxed. There are three buckets, and an STR with a cost seg usually lands money in all three.

For 2026, Rev. Proc. 2025-32 puts the top of the 0% capital gain bracket at $98,900 of taxable income for married couples filing jointly and $49,450 for single filers. The 20% rate starts above $613,700 joint and $545,500 single. The 25% cap on unrecaptured §1250 gain comes from §1(h)(1)(E) and is not indexed. Treas. Reg. §1.168(k)-1(f)(3) is the rule that keeps bonus from hiding: it treats the bonus deduction as depreciation for §1245 and §1250, and for real property it does not count as straight-line.

The 3.8% net investment income tax under §1411 can sit on top of all of it, if your modified AGI is over $250,000 joint or $200,000 single. Those thresholds are written into the statute and have not moved since 2013.

How does a cost seg change the tax when you sell?

Without a study, nearly all the depreciation on a rental is building depreciation, and the most it can ever cost you on the way out is 25%. With a study, a slice of it was reclassified into 5, 7 and 15-year property and usually taken as bonus. That slice comes back at ordinary rates instead. Whether that is a bad trade depends on the gap between the rate you deducted it at and the rate you pay back at, and on how many years you held the money in between. It is rarely a reason to skip the study. It is a reason to know the number before you list the house.

The detail that changes the number most is the sale price allocation. §1245 recapture on an asset is limited to the gain on that asset. If the furniture you depreciated to zero is worth $15,000 on the day you close, that is all the gain on the furniture, and the rest of the furniture depreciation is never recaptured at ordinary rates. The money still shows up, because the price you did not allocate to furniture is allocated to the house, and it lands as capital gain there. The allocation has to reflect fair market value, and the buyer's incentives run the other way, because a buyer wants more of the price in short-life assets. Write it into the purchase agreement and keep the support.

A worked example, with made-up round numbers

A short-term rental bought for $500,000: $100,000 land, $400,000 depreciable. A cost seg moved $80,000 into 5-year personal property and $20,000 into 15-year land improvements, both taken as bonus. The remaining $300,000 is the building, on straight-line. By the year of sale the owner has taken $130,000 of depreciation in total: $80,000 on the personal property, $20,000 on the land improvements (of which $5,000 is what straight-line would have allowed), and $30,000 on the building.

They sell for $640,000 net of commissions and closing costs, and the agreement allocates $15,000 to furniture and equipment and $20,000 to the land improvements, both supported by appraisal. Adjusted basis is $500,000 minus $130,000, so $370,000. Total gain is $270,000. Here is how it splits:

Two things to take from that table. The ordinary-rate slice is $30,000, not the $100,000 of bonus the study produced, because recapture follows what the assets are worth at sale. And the 25% bucket is real money even without a study: on a $300,000 building held ten years, straight-line alone is close to $77,000 at 39 years or $109,000 at 27.5.

Can I avoid recapture by not taking depreciation?

No, and this is the most expensive mistake in the whole topic. §1016(a)(2) reduces basis by depreciation "allowed," but "not less than the amount allowable." The §1250 rules use the same allowed-or-allowable measure. If you never claimed depreciation on the building, you pay recapture on the depreciation you were entitled to and never received the deduction for.

If that is your situation, the fix is an accounting method change on Form 3115, which lets you take the missed depreciation as a catch-up adjustment in the year of change without amending old returns. Changing from an impermissible to a permissible method of depreciation is on the IRS list of automatic changes, and it can generally still be made for the tax year you sell, but not after that. With only one year missed, the fix is usually an amended return instead. Ask about it now if a sale is on the calendar. The Schedule E line-by-line guide shows where Line 18 and Form 4562 connect.

What happens to my suspended passive losses when I sell?

If the rental produced losses you could not use (because stays averaged more than 7 days, or you did not materially participate in a short-stay year), Form 8582 has been carrying them forward. §469(g)(1)(A) frees them when you dispose of your "entire interest" in the activity in a transaction where all gain or loss is recognized. The losses first offset net passive income from your other activities that year, and whatever is left is treated as nonpassive. It can offset wages.

That makes the sale year a good year to know your suspended total, because it can cancel a large part of the gain's tax. If you did run the property as a non-passive STR every year (7-day average or less, plus material participation), there may be nothing suspended, and the gain itself may be nonpassive too. The STR loophole playbook covers how a property moves between those treatments year to year.

Grouping matters here. If you elected to treat several rentals as one activity, selling one of them is not a disposition of your entire interest in that activity, and the losses can stay stuck. Owners who hold properties in separate LLCs sometimes assume each LLC is its own activity for this purpose. That depends on the grouping, not the entity. The multi-LLC portfolio post covers the per-entity books side of that.

Does the 3.8% net investment income tax apply to an STR sale?

Often, but not always. §1411 taxes net gain from disposing of property, except property held in a trade or business that is not a passive activity for you. A short-stay rental where you materially participate is not a passive activity under §469. Whether it is also a trade or business for §1411 is a separate facts question about how the property is run, and the answer moves the gain on the example above by about $10,000 for a high-income seller. Your CPA should decide it from the hours log and the operating facts, and the log has to exist first. The material participation guide covers the seven tests.

Does a 1031 exchange avoid recapture?

It defers recapture on the real property, which carries into the replacement property's basis. Two STR-specific catches. Since 2018, §1031 covers real property only, so the furniture and equipment you sell with a turnkey listing are a taxable sale of personal property, recapture included. And components a cost seg classified as §1245 property can still be real property under the exchange definition in Treas. Reg. §1.1031(a)-3, which means §1245(b)(4) can trigger recapture inside an otherwise clean exchange if the replacement property does not carry enough §1245 property to absorb it. That one needs the cost seg provider and the qualified intermediary looking at the same spreadsheet before you close, not after.

Does it matter if I close in December or January?

The gain lands in the tax year the sale closes, and so does the release of suspended losses. A December 30 closing and a January 4 closing can produce different answers if your income, bracket or state residency changes between the two years, or if you are also placing a replacement property in service and want its first-year depreciation in the same year as the gain. Neither date is better in general. What you need is both years modeled before you sign the closing date, and that needs a clean basis schedule: purchase price, land share, each improvement with its date, each cost seg class, and every year's depreciation. If that schedule does not exist yet, build it before you list. Reconstructing it from old returns after an offer arrives is the slow way.

What to pull together before you list

1. The settlement statement from the purchase, and the land versus building split you used.
2. The cost seg report, if any, with the amounts by class and the bonus rate taken in each year.
3. Every capital improvement with invoices and dates. Improvements raise basis; repairs do not. The repairs vs improvements guide covers the line.
4. Every Form 4562 and Schedule E, to confirm depreciation was actually claimed each year. If not, ask about Form 3115 now.
5. Form 8582 carryforwards, by activity, and how your rentals are grouped.
6. A supportable value for the furniture and equipment at sale, for the purchase agreement allocation.
7. Your hours log for the years the property was run as a non-passive STR. The material participation log is the free one we built.

The year-end list for properties you are keeping is in the Q4 tax-season checklist. The deduction side of this story is in cost segregation for STR operators and Section 179 vs bonus depreciation.

Frequently asked questions

What is the depreciation recapture tax rate on a rental property in 2026?

It depends on the asset. Depreciation on furniture, appliances and other §1245 property is recaptured as ordinary income, at your regular rate up to 37%. Straight-line depreciation on the building is unrecaptured §1250 gain, taxed at your ordinary rate but capped at 25%. Gain above the depreciation taken is long-term capital gain at 0%, 15% or 20%. The 3.8% net investment income tax can apply on top of any of them.

Does a cost segregation study increase depreciation recapture when I sell?

It changes the character of part of the gain. Depreciation a study moves into 5 and 7-year property is §1245 recapture, taxed as ordinary income to the extent of the gain allocated to those assets. Bonus taken on 15-year land improvements counts as additional depreciation under §1250, which is also ordinary. Without a study, the same dollars would have been building depreciation, capped at 25%. Recapture on the personal property is limited to the gain on it, so a low fair-market-value allocation to used furniture limits it.

Can I avoid depreciation recapture by not claiming depreciation?

No. Under §1016(a)(2) your basis drops by the depreciation allowed or allowable, whichever is greater, so the gain is computed as if you had claimed it. Skipping depreciation gives up the deduction and keeps the recapture. A missed-depreciation catch-up through a Form 3115 accounting method change, filed no later than the year of sale, can generally recover it.

What happens to suspended passive losses when I sell my rental?

Under §469(g)(1)(A), when you dispose of your entire interest in the activity in a fully taxable sale to an unrelated person, the losses from that activity, net of other passive income, become nonpassive and can offset wages and other income that year. A sale to a related party under §267(b) keeps them suspended. An installment sale frees them in proportion to the gain recognized each year. A 1031 exchange does not free them.

Does a 1031 exchange avoid depreciation recapture on a short-term rental?

It defers recapture on the real property you exchange. Since 2018, §1031 covers real property only, so furniture and other personal property sold with the house are a taxable sale. Components a cost seg classified as §1245 property can also trigger recapture under §1245(b)(4) if the replacement property does not carry enough §1245 property. Have the cost seg provider and the exchange intermediary compare notes before closing.

Related deep dives

• Cost segregation for STR operators: what a study reclassifies, and the 27.5 versus 39-year question.
• Cost seg timing, year 1 vs year 2: which bonus rate applies and what a late study costs.
• Section 179 or bonus depreciation on an Airbnb? Including §179 recapture when use changes.
• The STR tax loophole, full §469 playbook: when losses are passive and when they are not.
• How to track §469 material participation: the seven tests and what the log needs.
• Repairs vs improvements: what raises basis and what is deducted now.
• Schedule E line by line: Line 18 depreciation and Form 4562.
• Multi-LLC portfolios: keeping per-property books when entities multiply.
• When is a new Airbnb placed in service? The start date every depreciation schedule runs from.

Sources

• IRC §1245: ordinary recapture of depreciation and amortization on personal property, limited to gain, and the (b)(4) like-kind exchange rule.
• IRC §1250: recapture of additional depreciation (depreciation in excess of straight-line) on real property, and the (b)(3) allowed-or-allowable measure.
• IRC §1(h): the 25% maximum rate on unrecaptured section 1250 gain, (h)(1)(E) and (h)(6).
• Treas. Reg. §1.168(k)-1(f)(3): bonus depreciation is depreciation for §1245 and §1250 recapture and is not straight-line for §1250.
• IRC §1016(a)(2): basis is reduced by depreciation allowed, but not less than the amount allowable.
• IRC §469(g): suspended losses on a fully taxable disposition of the entire interest, the related-party rule, death, and installment sales.
• IRC §1411: the 3.8% net investment income tax, its $250,000 and $200,000 thresholds, and the exception for property held in a non-passive trade or business.
• IRC §1031 and Treas. Reg. §1.1031(a)-3: like-kind exchanges limited to real property after 2017, and the definition of real property.
• Rev. Proc. 2025-32: 2026 capital gain rate thresholds ($98,900 and $613,700 joint; $49,450 and $545,500 single).
• IRS Publication 544, Sales and Other Dispositions of Assets: Form 4797, §1231 gains, and depreciation recapture.
• IRS Publication 925, Passive Activity and At-Risk Rules: dispositions of an entire interest and Form 8582 carryovers.

Disclaimer

RentReel is bookkeeping software, not tax advice. The $500,000 purchase and $640,000 sale are made-up round numbers to show the mechanics. Rules and rates are cited to the statutes, regulations and IRS publications current as of October 2026. State tax on the gain, the sale price allocation, activity grouping, NIIT treatment and any exchange need a CPA, ideally one who works with short-term rentals.