Depreciation Recapture Is a Buzzkill — But Our New Calculator Can Help

We just launched a tool I’ve been wanting for a while — a Real Estate Capital Gains Tax Calculator: https://www.MyTexasCPA.com/RealEstateTaxCalc/

This free tool helps real estate investors estimate their tax bill when they sell a property. It takes into account:

• Purchase price

• Improvements

• Depreciation (including bonus depreciation)

• Sale price

• Holding period

Then it does the not-so-fun math: calculating your depreciation recapture, capital gains tax, and Net Investment Income Tax (NIIT).

This isn’t a replacement for a full tax projection (which we also offer), but it’s a great way to get a ballpark figure fast—especially when you’re evaluating a potential sale and don’t want to be blindsided by the IRS. 

Why It Matters: The Depreciation Recapture Surprise

A lot of investors assume if they didn’t make money on a property, there’s no tax due. Unfortunately, that’s not always the case.

When you own rental property, you get to deduct depreciation every year. This helps reduce your taxable income—awesome, right? But when you sell, the IRS wants a piece of that back. That’s depreciation recapture.

This gets even more intense if you used cost segregation. You’ve probably heard it in every sponsor pitch deck—“We’re using cost seg to juice your tax deductions upfront!” And hey, it works. By breaking out components like carpet, fixtures, and appliances, you can depreciate them over 5, 7, or 15 years instead of 27.5. Add bonus depreciation to the mix, and you could be writing off a huge chunk of the building in year one.

Let me be clear: I’m still pro–cost seg. It’s a great strategy. But it’s important to understand the trade-offs. Getting a big deduction and being able to use that deduction are two different things but we’ll save passive loss rules for another day. If you can offset high-income years now, that’s real tax savings.

Yes, you’ll recapture that depreciation later—but often at a lower tax rate (25% for recapture vs. up to 37% for ordinary income). That’s tax rate arbitrage. Plus, there’s a time value of money advantage—you get to use that savings now instead of paying later.

The Recapture Breakdown

So, when you sell a property, your gain gets split into:

1. Depreciation Recapture – Taxed at up to 25% on the depreciation you took (or could have taken).

2. Capital Gains – Taxed at 0%, 15%, or 20%, depending on your income.

3. NIIT – An extra 3.8% if your income exceeds certain thresholds.

That’s where our calculator really helps—it shows you how much of your gain falls into each bucket.

The Ugly Scenario We’re Seeing Too Often

Here’s the part we’re seeing more and more lately: clients are selling properties for less than they bought them. Loss on paper. But because of big cost seg and bonus depreciation deductions, the recapture still kicks in—creating a tax bill even though they lost money overall.

It gets even worse in syndicated deals where investors might not see a dime at sale... but still get a K-1 with a taxable gain. That’s right—no cash, no gain, and still, surprise! Here’s some taxable income.

We’ll be diving into some strategies to handle this in future newsletters—there are ways to soften the blow if you plan ahead.

Until then, go give the calculator a spin. Kick the tires. Tell us what works and what doesn’t. It’s built for you, and we’re open to feedback to keep improving it.

Try out the calculator—and if something doesn’t look right or you’ve got feedback, just hit reply and let me know. We can tweak the code; this tool’s built for you.

And if you’re ready for a full projection based on your actual numbers, we can do that too—just reach out.