🏡 What is Depreciation Recapture in 2025?

Introduction

Selling your home should feel like a fresh start—not a surprise tax bill 💸. The U.S. tax code does give homeowners some great breaks, especially with the Section 121 Exclusion, which lets you exclude up to $250,000 of gain if you’re single—or $500,000 if you’re married—from the sale of your primary home. Sounds dreamy, right?

But if you’ve rented out part of your home (maybe a basement apartment or that spare bedroom you turned into an Airbnb 🌙), there’s a twist: depreciation recapture. Let’s walk through what that means, how it works, and why you don’t want to ignore it.

What is Depreciation?

Depreciation is the IRS’s way of saying, “We know houses wear out.” 🏚️ So, if you rent out part of your home, you can deduct a portion of its value each year over 27.5 years. That lowers your taxable rental income—a win while you own the home.

What is Depreciation Recapture?

Here’s the catch 🪤: when you sell that home, the IRS wants to “recapture” those tax benefits. Translation: you pay tax (up to 25%) on the depreciation you claimed. Even if you get the Section 121 exclusion on your gain, depreciation recapture still applies to the rental portion.

How the Section 121 Exclusion Works

To snag this exclusion, you must:

• ✅ Own the home for at least 2 years

• ✅ Live in it as your main home for 2 of the past 5 years

• ✅ Keep gains under $250K (single) / $500K (married)

The exclusion helps shield most homeowners from capital gains tax—but it doesn’t erase depreciation recapture on the rented part.

How Depreciation Recapture Impacts You

• The owner-occupied portion of your gain can qualify for the Section 121 exclusion 🎉.

• The rental portion? That’s where depreciation recapture kicks in. You’ll owe tax on the depreciation you claimed, plus capital gains tax on that share of the appreciation.

• The calculation is based on square footage rented vs. personal use.

Example

Let’s use a real-world style example.

• Home purchase price: $500,000

• Rented portion: 25% (think: basement apartment)

• Depreciation claimed: $15,000 total

• Sale price in 2025: $750,000

• Capital gain: $250,000 ($750,000 – $500,000)

Step 1: Allocate gain.
25% of $250,000 = $62,500 rental portion
75% of $250,000 = $187,500 personal portion

Step 2: Depreciation recapture.
Tax on $15,000 depreciation = $3,750 (25%)

Step 3: Apply Section 121.
The $187,500 gain on the personal side is fully excluded under Section 121. 🎉

Step 4: Rental side.
The $62,500 gain is taxable, plus the $3,750 depreciation recapture.

👉 Result: The homeowner saves big thanks to Section 121, but still owes tax on the rental portion and depreciation recapture.

Smart Planning Tips

• ⏸️ Stop renting before selling – depreciation stops when rental use stops.

• 🧾 Keep records – track depreciation claimed, improvements, and square footage use.

• 💡 Plan for recapture – it’s not optional; budget for it.

• 🤝 Talk to a tax pro – rules can get tricky fast.

Conclusion

The Section 121 exclusion is a powerful tool for homeowners, but renting out even part of your home changes the equation. Depreciation recapture is like the IRS saying, “Don’t forget what we gave you.” By understanding how it works—and planning ahead—you can minimize surprises and keep more of your sale proceeds in your pocket.

Thinking about selling your home, and are not sure how much depreciation recapture you’ll owe? Let’s talk it through. Book a call with Lisa Brugman, EA and Associates.