When you sell an STR that took bonus depreciation, the recapture splits into two pieces. The 5-year personal property and 15-year land improvements are §1245 property — recaptured at ordinary income rates up to 37% federal. The 39-year building shell is §1250 property — recaptured as "unrecaptured §1250 gain" at a 25% federal cap. On a $750,000 STR sold after 5 years with $165,000 of bonus dep taken, that's roughly $48,000 in §1245 ordinary-rate recapture plus $9,000 in §1250 gain — before state taxes and any capital gain above the depreciated basis.
If you've read the STR loophole explainer or our complete STR bonus depreciation guide, you understand the upside: a $187,000 Year-1 deduction on a typical $850k cabin can shelter your entire W-2 income in the year you buy.
What gets discussed less is the back end. Every dollar of bonus depreciation you take is a dollar of future tax liability you're deferring — and at sale, the IRS wants its money back. Worse: the bulk of your bonus dep gets recaptured at ordinary rates (up to 37% federal), not the 25% §1250 cap most investors assume.
This article walks through the mechanics. We'll cover what gets recaptured, the §1245 vs §1250 split, a fully worked example using a Joshua Tree STR, and the three legitimate strategies for deferring or eliminating recapture entirely.
The two recapture buckets: §1245 and §1250
Recapture mechanics live in two sections of the Internal Revenue Code, and they treat your STR's depreciation very differently.
§1245: personal property + 15-year land improvements
Under IRC §1245, any property that's "section 1245 property" — defined to include depreciable personal property (5-year MACRS items like appliances, FF&E, finishes) and 15-year land improvements (pools, hot tubs, patios, outdoor kitchens, fencing) — has its accumulated depreciation recaptured as ordinary income at sale.
The recapture is limited to the lesser of (a) total depreciation taken on the §1245 property, or (b) the gain realized on sale. So if you took $130,000 of bonus dep on the 5-year and 15-year buckets and sold for a $200,000 total gain, the full $130,000 is recaptured at your ordinary marginal rate (up to 37% federal).
§1250: the 39-year building shell
Under IRC §1250, real estate buildings that depreciated via straight-line MACRS (the 39-year structural portion of your STR) are recaptured as "unrecaptured §1250 gain" — taxed at a 25% federal cap rather than ordinary rates.
That 25% cap is lower than the ordinary 37% top bracket — but higher than the standard long-term capital gains rates (15-20%). It's a hybrid treatment specifically for depreciated real estate.
Common misconception: "I'll just pay the 25% recapture rate when I sell." That's only true for the 39-year building portion. The bonus dep portion — which is the bulk of what you took in Year 1 — is §1245 ordinary recapture, up to 37%. This is the single biggest item most STR investors get wrong about exit planning.
How recapture actually plays out: a Joshua Tree example
Here's a realistic 5-year hold on a Joshua Tree desert cabin. Numbers come from our Joshua Tree market profile using FHFA land ratios and the market's typical 25.9% bonus-eligible rate. 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's the back end of the trade. In Year 1, you saved ~$72,000 in federal tax by electing bonus depreciation. At sale 5 years later, you owe ~$72,000 in §1245 recapture on that same bonus dep, plus the §1250 gain on the building's straight-line depreciation.
Sounds like a wash. It isn't — for three reasons.
Why bonus depreciation is still almost always the right call
1. Time value of money
The $72,000 you saved in Year 1 has been earning return for 5 years before you pay it back. At an 8% discount rate, that's worth roughly $106,000 in 2031 dollars — so paying $72,000 of recapture in 2031 is actually a $34,000 net gain. The longer the hold, the larger the spread.
2. Bracket arbitrage
Many STR investors take bonus depreciation during peak W-2 earning years (top 35-37% bracket), then sell after retirement or in a low-income year (22-24% bracket). The §1245 ordinary recapture rate matches your current marginal bracket — not the bracket from the year you took the deduction. A 15-point bracket spread on $194,250 of §1245 recapture is roughly $29,000 in saved tax.
3. The three exit strategies
None of the recapture math matters if you don't pay it. Three legitimate strategies eliminate or defer recapture entirely:
How to defer or eliminate STR recapture
Strategy 1: §1031 like-kind exchange
Under IRC §1031, you can defer all recapture and capital gain by exchanging the property for a "like-kind" replacement — any real property held for investment or business use. The timeline is strict: 45 days to identify the replacement, 180 days to close. The deferred recapture and basis carry over to the new property.
This is the most common exit strategy for serious STR investors. Roll a $900k Joshua Tree property into a $1.2M Park City property and you've deferred all $116,000 of federal tax above — until you sell the Park City property (or 1031 that one too).
2025 change worth knowing: The Tax Cuts and Jobs Act limited §1031 to real property only (no more vehicles, machinery, etc.). For real-estate-to-real-estate exchanges, §1031 remains fully available in 2026 with no scheduled sunset.
Strategy 2: hold until death (stepped-up basis)
Under IRC §1014, when you die, your heirs receive a basis "stepped up" to the property's fair market value as of your date of death. All depreciation recapture and capital gain accumulated during your lifetime is eliminated.
For long-hold investors who never need to access the property's equity, this is the gold standard. The IRS gives you a 37% Year-1 deduction at age 50 and forgives all the recapture at age 85. The catch: estate tax may apply at the top of the basis — currently a $13.61M federal exemption per person, so only relevant for high-net-worth investors.
Strategy 3: sell in a low-bracket year
If you can't 1031 and can't wait, time your exit to a year with low ordinary income. Common scenarios: a sabbatical year, a startup loss year, a year you take significant capital losses elsewhere, or after retirement when W-2 income is gone. Dropping from a 37% bracket to a 22% bracket on $194,250 of §1245 recapture saves $29,000 in federal tax.
State recapture: don't forget
Federal recapture is only half the story. Most states tax recapture at ordinary state income tax rates — adding another 4-13% to the bill depending on jurisdiction. Our state conformity map covers how each state handles the §168(k) treatment on the way in and the recapture on the way out.
States with no income tax (TX, FL, TN, NV, WA, WY, AK, SD, NH) impose zero state recapture — a meaningful advantage on exit if you're choosing where to buy.
Plan the exit at the same time you plan the entry
The single biggest mistake STR investors make is treating bonus depreciation as a Year-1-only decision. The election has a 5-15 year tail. Before electing §168(k) on a property, model:
- Likely holding period. 1031 buyers benefit from short holds (deferred forever); hold-and-die investors benefit from 20+ year holds.
- Bracket trajectory. Your federal bracket today vs. likely bracket at exit.
- State conformity on both sides. A CA-resident investor faces $1 of CA recapture for every $1 of bonus they didn't get credit for on the state side anyway.
- Exit strategy. If you have a 1031 plan, the recapture math is largely academic.
Size the bonus depreciation before you buy.
Run any active STR through our $99 property report and get an item-by-item §168(k) estimate — closely calibrated to a formal $5,000–$8,000 cost seg study. Know your Year-1 deduction and your future recapture exposure before you make an offer.
Run a Property Report →Frequently asked questions
How much is depreciation recapture on an STR when I sell?
On a typical $750,000 STR where you took $165,000 in bonus depreciation, recapture at sale breaks into two pieces: (1) the 5-year and 15-year property (roughly $130,000) is §1245 property — recaptured at ordinary income rates up to 37% federal, so $48,000+ in tax at the top bracket; (2) the 39-year building portion that depreciated (~$35,000 over 5 years) is §1250 property — recaptured as "unrecaptured §1250 gain" at a 25% federal cap, ~$8,750. Plus capital gain above the depreciated basis at 0/15/20%. State tax adds on top.
Does bonus depreciation get recaptured as ordinary income?
Yes — the portion that came from 5-year personal property (appliances, FF&E, finishes) and 15-year land improvements (pools, hot tubs, patios, fencing) is §1245 property under IRC §1245(a)(3). At sale, the gain attributable to that depreciation is taxed as ordinary income up to the seller's marginal rate (up to 37% federal in 2026). The 25% §1250 cap only applies to the 39-year structural portion that was depreciated using straight-line MACRS — not the bonus dep portion.
How do I avoid or defer depreciation recapture on an STR?
Three main strategies: (1) §1031 like-kind exchange — defer all recapture and capital gain by reinvesting proceeds into another rental property within 45 days/180 days timelines; (2) hold until death — heirs receive a stepped-up basis under IRC §1014, which eliminates all accumulated recapture and gain; (3) sell in a year with low ordinary income (sabbatical, post-retirement, offsetting losses) to reduce the §1245 ordinary recapture rate. Each strategy has specific requirements; consult a CPA.
What's the difference between §1245 and §1250 recapture for an STR?
§1245 covers personal property (5-year MACRS) and certain real property (15-year land improvements). Recapture is taxed as ordinary income up to the lesser of (a) depreciation taken or (b) gain realized. §1250 covers real estate buildings (39-year MACRS for non-residential or 27.5-year residential). The portion of gain attributable to depreciation is "unrecaptured §1250 gain" — capped at 25% federal. For an STR that took bonus dep via cost segregation, both apply: the bonus-eligible portion is §1245, the building shell is §1250.
Is bonus depreciation still worth it if I'm going to pay recapture later?
Almost always yes: (1) time value of money — $50K saved today is worth far more than $50K paid in recapture 5-10 years later; (2) bracket arbitrage — high-W-2 earners take bonus dep at 37%, then sell at 22-24% after retirement; (3) defer strategies (1031, hold-and-die) eliminate recapture entirely for investors who hold long enough or reinvest. The recapture risk is real but rarely a reason not to elect bonus dep — it's a reason to plan the exit at the same time you plan the entry.
This article is for educational purposes only and does not constitute tax advice. Consult a qualified CPA before relying on any of these strategies in your specific situation.