What Happens to Bonus Depreciation When You Sell Your Airbnb?

Most STR investors think about bonus depreciation as a one-way deduction. Buy the property, claim a $200k+ Year 1 write-off, save tens of thousands in federal tax, and move on. What gets skipped in nearly every YouTube video and Twitter thread on the strategy is the back half of the trade: when you sell, the IRS reverses part of the math.

That reversal is called depreciation recapture, and if you're not planning for it, your eventual sale can land a five- or six-figure surprise tax bill.

The good news: every recapture dollar is predictable, and most of the time it's avoidable. Here's exactly how it works in 2026, with worked numbers and four legal strategies for keeping recapture off your final return.

What is bonus depreciation recapture?

Depreciation recapture is the IRS reclaiming, at the time of sale, a portion of the depreciation deduction you previously took. The rationale is straightforward: depreciation reduced your ordinary income while you owned the property, which means part of the eventual sale gain is really just the IRS "getting back" deductions that were taken too aggressively against ordinary income rates.

For short-term rentals where you've claimed bonus depreciation, the recapture calculation runs across two distinct buckets, each with its own tax treatment.

The two recapture buckets: §1245 vs §1250

When a cost segregation study (or a DepreciMax property report) splits your purchase price into IRS asset classes, the resulting deduction lands in one of three categories. Each gets a different recapture treatment at sale.

Bucket 1: §1245 — 5-year personal property (recaptured as ordinary income)

Under IRC §1245, the depreciation you took on 5-year class personal property — appliances, decorative finishes, custom cabinetry, smart home systems, conveyed FF&E — is recaptured as ordinary income, up to the amount of the gain. That means it's taxed at your marginal federal rate (up to 37% in 2026), plus state income tax where applicable.

This is the most expensive recapture bucket. On a property where AI photo analysis or a formal cost seg study classifies 12–18% of the purchase price as 5-year personal property, §1245 recapture is where the bulk of the tax bill lands.

Bucket 2: §1250 — 15-year land improvements and 39-year structural (capped at 25%)

Under IRC §1250, depreciation on real property — your 15-year land improvements (pools, hot tubs, fire pits, outdoor kitchens, pergolas, landscaping) and your 39-year structural basis — is treated differently. For property placed in service after 1986, the depreciation portion is reclassified as "unrecaptured §1250 gain," taxed at a maximum 25% federal rate.

This is significantly more favorable than §1245 treatment. A taxpayer in the 37% bracket pays 25% on §1250 gain — a 12-point savings on every dollar of depreciation in this bucket.

Bucket 3: Pure capital gain (the appreciation above your purchase price)

Any sale gain above the original purchase price (after adjustments) is treated as a regular long-term capital gain at 0%, 15%, or 20% federal — depending on your taxable income. This part of the gain isn't depreciation recapture at all; it's pure appreciation, and it's taxed the most favorably of the three buckets.

Worked example: $1M Joshua Tree STR sold after 5 years

Numbers make this concrete. Let's run a typical STR: $1M purchase, modest appreciation, full bonus depreciation claimed in Year 1, sold five years later. For a worked example on a $2.995M Joshua Tree property yielding $803,596 in bonus-eligible property, see the case study in our 2026 STR Bonus Depreciation Market Study.

That $250k Year 1 deduction at a 37% federal rate plus 3.8% NIIT and (in non-conforming states) state tax produces roughly $95,000–$120,000 in Year 1 tax savings. So far, so good. Now fast-forward five years.

You took roughly $108k in Year 1 federal tax savings, then owed about $129k at sale — a net federal cost of ~$21,000 over five years. But the time value of money matters a lot here. That $108k was in your pocket for five years; the $129k is paid in current dollars. Holding the money interest-free for five years has real value (roughly $25k–$40k of present-value benefit, depending on opportunity cost).

And critically — every dollar of recapture is avoidable with the right exit planning. Here's how.

Four legal ways to defer or eliminate recapture

1. 1031 like-kind exchange (full deferral)

   Under IRC §1031, exchanging your STR for another investment property defers both capital gains tax and depreciation recapture indefinitely. The depreciation basis (and recapture exposure) carries over to the replacement property. You can chain 1031s repeatedly across a lifetime. This is the most powerful single tool — and the most common reason sophisticated STR investors trade up rather than cash out.

2. Installment sale under §453 (spread the bill)

   Selling on an installment plan spreads capital gains and §1250 unrecaptured gain across multiple tax years — useful for keeping income below NIIT thresholds or smoothing across a low-income year. Important exception: §1245 ordinary income recapture cannot be deferred under §453 and is taxed in full in the year of sale, regardless of installment treatment. So this only helps with the §1250 and capital gain portions.

3. Hold until death — §1014 step-up basis

   This sounds morbid, but it's a mainstay of estate-stage real estate planning. When the owner dies, IRC §1014 resets the property's basis to fair market value at date of death. All accumulated depreciation — and all recapture exposure — disappears for the heirs. Combine this with a 1031 ladder during life and you can claim Year 1 bonus depreciation on every property in a portfolio while ensuring zero recapture is ever paid by anyone.

4. Opportunity Zone investment (partial deferral + step-up)

   Rolling sale gains into a Qualified Opportunity Fund under IRC §1400Z-2 defers tax on the original gain until 2026 (or until the QOF investment is sold, whichever is earlier), and a 10-year hold eliminates tax on the QOF's own appreciation. Use cases for STR exits are limited — most STR markets aren't in OZs — but it's worth considering when the geography aligns.

The "I never claimed it" trap (recapture applies anyway)

This is the most expensive mistake in STR exit planning. Under §1250(b)(3), depreciation recapture is calculated on the amount of depreciation that was "allowed or allowable." That phrase is doing critical work: the IRS taxes you on the depreciation you could have taken whether or not you actually claimed it on your return.

The fix exists. Form 3115 (Application for Change in Accounting Method) lets you catch up missed depreciation in a single current-year §481(a) adjustment — no amended return required. A property that's been sitting un-depreciated for two years can claim two-plus years of missed bonus depreciation in one consolidated current-year deduction. This is one of the highest-ROI tax filings available to STR investors today.

Recapture vs. capital gains tax: a quick comparison

Investors often conflate these. They're separate calculations applied to the same sale:

• Capital gains tax applies to the difference between your purchase price and sale price. It is a tax on appreciation. Rate: 0/15/20% federal long-term, plus 3.8% NIIT.
• Depreciation recapture applies to the depreciation deductions you took (or could have taken) during ownership. It is a tax on the deduction itself being reversed. Rate: ordinary income (up to 37%) for §1245, capped 25% for §1250 unrecaptured gain.

On any STR sale where you took bonus depreciation, both apply. The IRS calculates recapture first (per §1245 and §1250 rules), then any remaining gain is treated as long-term capital gain. Most online "capital gains calculators" miss this step entirely — they show you the appreciation tax but not the recapture, which can be the larger of the two numbers on a heavily-depreciated STR.

The bottom line for STR investors

Bonus depreciation is not free money. It is a high-leverage tax acceleration tool that creates a known future liability at sale — a liability that is almost always defer-able, and often permanently eliminable, with deliberate planning.

The two practical takeaways:

1. Model both ends of the trade before you buy. If you intend to flip the property in 3–5 years, the recapture math may be unfavorable enough to change the deal calculus. If you intend to hold for 10+ years and 1031 forward, it's a non-issue.
2. Talk to your CPA about §1031 planning at acquisition, not at sale. Structuring the original purchase with eventual exchange in mind (entity selection, debt structure, replacement property pipeline) preserves your full flexibility.

Frequently asked questions

What is bonus depreciation recapture?

Depreciation recapture is the IRS reclaiming, at the time of sale, part of the depreciation deduction you previously took. The 5-year personal property portion is recaptured as ordinary income under §1245 (up to 37% federal). The 15-year land improvement and 39-year structural portions are taxed as unrecaptured §1250 gain at a maximum 25% federal rate.

Do I have to pay recapture if I do a 1031 exchange?

No. A properly structured §1031 like-kind exchange defers both capital gains tax and depreciation recapture indefinitely. The basis carries over to the replacement property. Chain 1031s across a lifetime and combine with §1014 step-up basis at death to eliminate recapture entirely.

What's the tax rate on depreciation recapture for an STR sale?

It depends on the IRS class. 5-year personal property is recaptured under §1245 at ordinary income rates (up to 37% federal in 2026). 15-year land improvements and 39-year structural depreciation are taxed as unrecaptured §1250 gain at a maximum 25% federal rate, plus 3.8% NIIT if applicable.

Does death erase depreciation recapture?

Yes. Under IRC §1014, basis steps up to fair market value at the owner's date of death — eliminating all accumulated depreciation and recapture exposure for heirs. "Hold until death" is a legitimate (if morbid) exit strategy, particularly when combined with a 1031 exchange ladder during life.

If I never claimed bonus depreciation, do I still owe recapture when I sell?

Yes. Under §1250(b)(3), recapture is calculated on depreciation "allowed or allowable" — meaning the IRS assumes you took it whether you did or not. The fix is to file Form 3115 to claim missed depreciation via a §481(a) catch-up adjustment in the current year, capturing the deduction you missed.

How is depreciation recapture different from capital gains tax?

Capital gains tax applies to appreciation (purchase price → sale price). Recapture applies to the depreciation you took (or were entitled to take) during ownership. Both apply on the same sale. Recapture is calculated first; whatever remains of the gain after recapture is taxed at long-term capital gains rates.