You usually cannot avoid it
You can defer it, offset it, give the property away, or never sell.
The short answer
Deadlines close early
You have to set up a 1031 exchange before the closing, not after.
Section 121 does not clear it
Moving back in does not clear the tax. Section 121 excludes gain, but not gain that came from depreciation.
See which options are still open
Tell us where you are in the sale and we will tell you what is still available and what has already closed. Call (212) 641-0673 or use the contact form. We come back within 24 hours, and we are available evenings and weekends. Confidential, and handled by a CPA or EA, not a call center.
Your circumstances
decide which route suits you
The date
decides which routes are still open
01Six routes
Six routes that defer, offset or remove recapture
Six routes. You pick among them rather than working through them, and which ones are open depends on the date you ask.
Defer it with a 1031 exchange
Roll the proceeds into replacement real property and the gain generally defers, though 1031 exchange depreciation recapture can still come due. You have to set up the exchange before the sale closes, usually through a qualified intermediary. Take the proceeds into your own hands and it is a sale.
Spread it with an installment sale
Take the price over several years and the capped slice spreads with the payments. Ordinary recapture under either section does not spread. It is taxed in full in year one, so this works better on a building than on equipment.
Offset it with losses
Suspended passive losses are generally released in full when you dispose of your entire interest in the activity, in a fully taxable sale to an unrelated buyer. They can absorb a large part of the gain. Grouping several rentals as one activity blocks that release when you sell only one.
Never sell it
Refinance instead of selling and there is no disposition, so there is no recapture. The tax is deferred until you sell, and you keep depreciating the property against the rent.
Give it away
An outright charitable gift avoids current recapture, because there is no sale and no gain to recognize. Give away a mortgaged building and the debt relief counts as proceeds, which makes it a part sale. The deduction can be reduced for the ordinary income element, so model it before you commit.
Shrink it with partial dispositions
Replace a roof, an HVAC system or flooring and you can elect to write off the remaining basis of the part you removed. Less depreciation on the schedule means less to recapture at the sale. Make the election for the year the part comes out, not at the closing.
The example below dates each route against a sale contracted on May 12, 2026 and closing on June 30.
Deadline for each route on a sale contracted May 12, 2026
Contract signed May 12, 2026 · closing June 30, 2026
- Time the sale into a lower income yearclosed May 12, 2026contract signed
- Set up a 1031 exchangeclosed June 30, 2026at the closing
- Take a partial disposition on a replaced roofclosed Dec 31, 2026year the part comes out
- Offset with passive and capital lossesopen to Dec 31, 2026after the sale too
Illustrative example, not tax advice. Your own figures and rates will differ.
02Common belief vs the rule
Why Section 121 does not forgive depreciation on a converted rental
The belief
Convert rental property to primary residence, live there two years, claim the Section 121 exclusion, and the depreciation is forgiven.
What is true
Section 121 excludes up to $250,000 of gain, or $500,000 filing jointly, but it does not reach gain equal to the depreciation allowed or allowable after May 6, 1997. Rental years after 2008 and before the property becomes your main home can also cut the exclusion on the rest of the gain.
Why it costs money. The wrong answer is widely repeated online, including on national tax sites. Somebody acting on it moves house for two years, takes the disruption, and still owes tax on the same depreciation related gain at the sale.
Worked example: rented 2010 to 2023, moved in 2024 to 2026, sold March 2026, married filing jointly
| Amount | |
|---|---|
| Gain on the sale | $400,000 |
| Depreciation claimed | $150,000 |
| Excluded under the $500,000 joint exclusion | $250,000 |
| Still taxable, equal to the depreciation | $150,000 |
| Federal tax at the 25 percent cap | Up to $37,500 |
Two years in the property does not clear the depreciation. Rental years after 2008 can also cut the exclusion on the other $250,000. Illustrative, your own figures will differ.
03Step up in basis
The one route that removes the tax rather than moving it
Hold directly owned property until death and the depreciation you claimed over decades is generally not recaptured at all, by you or by your heirs. The basis resets to fair market value in their hands. A single member LLC is usually treated the same, while partnership or corporate ownership needs its own look.
Holding until death and a charitable gift are the only two routes that remove the tax rather than move it. Think carefully before selling a long held building late in life, and ask whether the next generation wants it. At that point the question becomes an estate one.
04Which disposals trigger it
Which disposals trigger recapture and which do not
A foreclosure, a deed in lieu and a part gift part sale all trigger recapture. An outright gift and moving in yourself do not.
- A foreclosure or a deed in lieu is treated as a sale. With nonrecourse debt the whole balance counts as your proceeds, so gain is common even though no cash changed hands. Recourse debt works differently and splits into two separate questions. Either way, recapture can fall due in a year you received nothing.
- A straightforward gift is not. Your basis and the recapture exposure carry across to whoever receives it. A part gift part sale is different, where you receive something for it, and recapture applies now to the extent the amount realized exceeds your adjusted basis.
- Moving in yourself is not either. Convert rental property to primary residence and no disposal has happened, so no tax is due at that moment. The recapture remains due on the eventual sale, and Section 121 will not clear it.
- A condemnation or casualty is an involuntary conversion that can trigger gain. Section 1033 can defer it where you acquire qualifying replacement property in time, generally within two years, or three years for condemned real property held for business or investment.
05New York treatment
New York treatment of a 1031 exchange and depreciation modifications
New York generally follows the federal 1031 result for individuals, but it decoupled from federal bonus depreciation for property placed in service on or after June 1, 2003, reported on Form IT-398. A cost segregated building can therefore carry a state basis that differs from the federal one.
06Worked example
What each route does to a $45,000 bill
A Brooklyn rental bought for $600,000 and sold for $850,000 produces a $430,000 gain, with $180,000 of it created by depreciation. Federal tax on that slice, at the 25 percent ceiling, is $45,000.
You pay it
Sell outright, $45,000 due with the 2026 return filed April 2027.
Deferred, not removed
1031 exchange, carried into the replacement property until you sell that. Installment sale over five years, about $16,000 in 2026 and the rest by 2027.
Reduced, by an amount that depends on your facts
Suspended passive losses released on the disposal, up to the full $45,000. Partial dispositions taken while you held, for example a $40,000 roof retired in 2022.
Removed
Charitable gift with no mortgage, or hold until death, the basis generally resets.
Illustrative example, not tax advice. Your own figures and rates will differ.
07FAQ
Depreciation recapture planning questions
Can I still reduce the tax after the sale has closed?
Almost nothing here is still available after the closing. An exchange has to be in place beforehand, an installment structure is part of the contract, and a gift replaces the sale entirely. What remains is loss planning: suspended passive losses release on the disposal, and capital losses reduce the capped slice.
Does a 1031 exchange remove depreciation recapture?
No, it defers the tax. The gain carries into the replacement property through your basis. You have to set up the exchange before the sale closes.
Can capital losses offset depreciation recapture?
Only against the capped slice. Ordinary recapture stays outside their reach beyond the usual $3,000 net capital loss deduction, so an equipment seller cannot plan around them.
Can I sell the property to my own LLC and start a new depreciation schedule?
The buyer gets a new schedule, and the price is worse than a sale to a stranger. Section 1239 makes the whole gain ordinary income where you own more than 50 percent of the buyer, with no Section 1231 treatment and no 25 percent ceiling.
Can I defer depreciation recapture into an opportunity zone fund?
Partly. Ordinary recapture under Sections 1245 and 1250 cannot go into a qualified opportunity fund. Qualified Section 1231 gain can, to the extent it exceeds that ordinary amount, so the capped slice and the appreciation are eligible. Recent legislation moved these rules.
Does refinancing trigger depreciation recapture?
No. A refinance is not a disposal, so no tax falls due. Pulling cash out of a property you keep is the one route with no tax cost at all.
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From the record
On planning early, and on setting up a plan before the season
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Get the timing right
Get the timing right before you sign
Most of what is on this list has to happen before the closing. A short call now is worth more than a long one in April. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising property owners on sale timing, basis and deferral. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.