Short answer: A 1031 exchange defers the tax on your past depreciation along with your capital gain, so nothing is recaptured at closing if you take no boot. The depreciation does not disappear: your old basis carries into the replacement property, keeps depreciating on its old schedule, and the deferred recapture comes due when you eventually sell in a taxable sale.
Reviewed by Jon Hilley. Last updated September 29, 2026.
Depreciation is the part of a sale most investors forget about until they see the tax bill. When you sell a rental outright, the gain created by years of depreciation is taxed at up to 25%, ahead of your ordinary capital gains rate. A properly structured 1031 exchange defers that tax along with the rest of your gain, which is a big reason the rules around boot in a 1031 exchange matter so much: any boot you take is taxed first as depreciation recapture.
Deferral is not forgiveness. Your depreciation history follows you into the replacement property through a carryover basis, and it shows up again when you sell without exchanging.
Key rules
- Gain is deferred, depreciation included: no gain is recognized when real property held for investment or business is exchanged for like-kind real property (IRC §1031(a)(1)).
- Boot is taxed as recapture first: gain recognized because of boot is taxed first as unrecaptured §1250 gain, at a maximum 25% rate, to the extent of prior depreciation (IRC §1031(b); IRC §1(h)(6)).
- Recapture carries over: depreciation recapture potential carries into the replacement property instead of being triggered (IRC §1250(d)(4)).
- Basis carries over: your replacement basis is generally the price of the new property minus the deferred gain (IRC §1031(d)).
- Two depreciation layers: the carried-over basis keeps depreciating on the old schedule, and any excess basis is depreciated as newly acquired property (Treas. Reg. §1.168(i)-6).
Is depreciation recaptured in a 1031 exchange?
Not if you defer the whole gain. If you buy replacement property of equal or greater value and reinvest all your net cash, there is no boot, so no gain is recognized and no depreciation is recaptured in the year of the exchange.
Most residential and commercial buildings placed in service after 1986 are depreciated straight-line, so there is usually no ordinary-income §1250 recapture. Instead, the depreciation portion of your gain is called unrecaptured §1250 gain and is taxed at up to 25% when it is recognized. The exchange defers that amount just like the rest of the gain.
That 25% is the depreciation recapture tax rate most investors hear quoted. It is a maximum: if your ordinary income tax rate is lower, the lower rate applies to that portion.
The cost segregation catch
If you used cost segregation and split out appliances, carpet, fixtures or other components as §1245 personal property, be careful. Since the Tax Cuts and Jobs Act, personal property is not like-kind property. Those components can trigger §1245 recapture as ordinary income unless you receive matching §1245 property in the exchange (IRC §1245(b)(4)). This is worth modeling with your CPA before you sell.
Exchanging a building for vacant land
Land is real property, so trading a rental building for vacant land qualifies. For a building depreciated straight-line there is generally no ordinary-income §1250 recapture to trigger, so the depreciation portion of your gain simply stays deferred. The trade-off is that land is not depreciable, so you give up future deductions. If the building you sell carries accelerated or bonus depreciation beyond straight-line, §1250(d)(4) can require recapture to the extent you do not receive enough depreciable building value, so have your CPA check this before you commit to land.
Does depreciation restart after a 1031 exchange?
Only partly. After the exchange you effectively have two assets for depreciation purposes. The carried-over basis continues on the relinquished property's remaining recovery period and method. Any additional basis, usually from buying a more expensive property with new debt or added cash, starts a fresh recovery period (27.5 years for residential rental, 39 years for nonresidential real property), after allocating part of it to land, which is not depreciable. That means two depreciation schedules for one building. The regulations also allow an election to treat the entire basis as newly placed in service; your CPA can tell you whether that helps.
Example: deferring $150,000 of depreciation
- Original purchase price: $500,000 ($400,000 building, $100,000 land)
- Depreciation taken: $150,000
- Adjusted basis: $350,000
- Sale price, net of selling costs: $800,000
- Realized gain: $450,000 ($150,000 unrecaptured §1250 gain plus $300,000 capital gain)
- Tax on the depreciation portion at 25%: $37,500
- Tax on the remaining gain at 15%: $45,000
- Net investment income tax at 3.8% on $450,000: $17,100
- Total federal tax if sold outright: $99,600
Assumptions: the full 25% rate applies to the depreciation portion, a 15% federal capital gains rate and the 3.8% net investment income tax apply to the rest, and state tax is not included. If instead you exchange into a $1,000,000 property and take no boot, all $99,600 is deferred. Your replacement basis is $1,000,000 minus the $450,000 deferred gain, or $550,000. The $350,000 carried-over basis keeps depreciating on the old schedule, and the $200,000 of excess basis (less the part allocated to land) starts a new schedule. The $150,000 of prior depreciation remains embedded in the new property.
To run your own numbers, use our depreciation recapture calculator.
Other questions investors ask
Do you pay both capital gains and depreciation recapture?
In a taxable sale, yes. The part of your gain equal to the depreciation you took is taxed first, at up to 25%, and the rest is long-term capital gain at 0%, 15% or 20%, plus the 3.8% net investment income tax where it applies. In a fully deferred 1031 exchange, you pay neither at closing.
How can you avoid paying back depreciation recapture?
You can defer it with a 1031 exchange and keep deferring it by exchanging again each time you sell. If you hold the property until death, your heirs generally receive a stepped-up basis (IRC §1014), which wipes out the deferred gain, including the depreciation portion. A taxable sale brings it all due.
What happens when you sell a property that you have depreciated?
Your gain is measured from your adjusted basis: what you paid, plus improvements, minus the depreciation you claimed or were entitled to claim. The depreciation portion is taxed at up to 25% and the rest as capital gain. See What happens when you sell a 1031 exchange property later?
Common mistakes
- Assuming the exchange erases depreciation: we regularly talk with investors who think a 1031 resets their basis. It does not; the deferred gain lowers the basis of the new property.
- Ignoring cost segregation components: the most common surprise we see is §1245 recapture on components that were split out years earlier and are no longer like-kind.
- Taking a little cash out: investors often expect a small amount of boot to be taxed at 15%. It is usually taxed at up to 25% because it is treated as depreciation first.
- Restarting depreciation incorrectly: we see returns where the whole new purchase price was depreciated from scratch. Talk to your CPA or tax attorney about the correct split and any election.
Run the numbers: try our free Depreciation Recapture Calculator.
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