I'm a Canadian selling my US rental. What is depreciation recapture?

Two things share almost the same name, and merging them is the standard published error. Ordinary recapture under IRC 1250(a) on a post-1986 straight-line residential rental building held more than a year is zero, because 1250(b)(1) counts only depreciation above straight line on property held that long and IRC 168(b)(3)(B) makes straight line mandatory. Sell inside a year and that limit never switches on, so the recapture is a real number. What bites on a longer hold is unrecaptured section 1250 gain, a capital gain with a 25 percent ceiling under IRC 1(h)(1)(E). The recapture is zero and the tax is real.

Is there depreciation recapture when I sell my US rental?

On a post-1986 residential rental building you’ve held more than a year and depreciated on the mandatory straight line method, ordinary recapture under section 1250(a) comes out at zero, and that changes the character of the tax rather than removing it. The depreciation still comes back, as unrecaptured section 1250 gain at a 25 percent maximum. Four provisions produce the zero.

1. IRC 1250(a)(1)(A) treats as ordinary income only “that portion of the additional depreciation (as defined in subsection (b)(1) or (4))”, and no more than the excess of the amount realized over “the adjusted basis of such property”, meaning the section 1250 property itself.
2. IRC 1250(b)(1) defines additional depreciation and, for property held more than one year, limits it to “such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted … under the straight line method of adjustment.”
3. IRC 168(b)(3)(B) says “the applicable depreciation method shall be the straight line method” for residential rental property, so no other method was open to you.
4. Straight-line depreciation can’t exceed straight-line depreciation, so the excess is zero and the 100 percent applicable percentage in 1250(a)(1)(B)(v) applies to zero. IRC 1250(b)(5)(A) closes the last gap in that: the straight-line counterfactual has to be run “using the recovery period applicable to such property”, so the two figures are identical by construction rather than by assumption. Ordinary recapture on a hold of more than a year is zero; the unrecaptured 1250 gain at up to 25 percent is not.

Here’s the tell that these are different provisions: the phrase “unrecaptured section 1250 gain” appears nowhere in section 1250. It’s defined in section 1, the rate section. Anything calling recapture a 25 percent tax has merged a rate rule from section 1 with an ordinary-income rule from section 1250.

The zero is conditional, and three things are worth checking. First, the chain above runs through IRC 168(b)(3)(B), which governs only property to which section 168 applies. “Post-1986” throughout this page is the placed-in-service date rather than the purchase date or the year of sale: section 203(a)(1)(A) of the Tax Reform Act of 1986 applies the modern regime “to property placed in service after December 31, 1986, in taxable years ending after such date”. IRC 1250(b)(5)(B) separately contemplates “property to which section 168 does not apply” and measures the straight-line counterfactual for it by the useful life actually used, so on property outside the modern regime the chain doesn’t run and the excess has to be computed rather than assumed. Second, if you ran a cost-segregation study, whatever it reclassified as personal property is recaptured at ordinary rates under IRC 1245. Not everything a study carves out gets there: 1245(a)(3)(B) expressly excludes “a building or its structural components” and reaches other tangible property only in the integral-part uses it lists, while IRC 1250(c) sweeps the remaining real property back into section 1250.

Third, and this is the one most summaries miss, land improvements. Treating sidewalks, driveways, fences and landscaping on a rental as section 1250 property is a reading rather than a citation, and it should be labelled as one: the IRS class-life table’s own asset class 00.3 covers improvements “whether such improvements are section 1245 property or section 1250 property” and settles nothing, so the character has to be reasoned off IRC 1245(a)(3), whose limbs run from personal property, through tangible property put to one of the integral-part uses in limb (B), to real property carrying one of the amortization deductions limb (C) lists, a single purpose agricultural or horticultural structure, a petroleum storage facility and railroad grading, and on ordinary rental facts a driveway or a fence answers none of them, which leaves IRC 1250(c). Nothing below turns on which way that goes: ordinary recapture follows either way, under section 1245 if such an asset is section 1245 property and under section 1250(a) if it is not. And sitting in section 1250 is not what produces the zero in the first place; the mandatory straight line method is.

Those assets fall in asset class 00.3 at a 20-year class life, which IRC 168(e)(1) turns into 15-year property. Being 15-year property is not itself what keeps them off the 168(b)(3) straight-line list, and it is worth saying so, because the list is not organised by class at all: limb (G) reaches qualified improvement property, which 168(e)(3)(E)(vii) makes 15-year property, and limb (E) reaches trees and vines, which 168(e)(3)(D)(ii) makes 10-year property. What matters is whether the particular asset answers one of the seven limbs, and only six of them describe property at all. A rental’s driveways, fences and landscaping answer none of those six; the seventh, limb (D), is a taxpayer election, and it comes back at the end of this paragraph. The descriptive limbs that look closest miss on the face of their own definitions: 168(e)(2)(A)(i) defines residential rental property as a building or structure, tested by whether 80 percent or more of the gross rental income from that building or structure is rental income from dwelling units; 168(e)(2)(B)(ii) takes out of nonresidential real property anything with “a class life of less than 27.5 years”, and the class life here is 20; and 168(e)(6) defines qualified improvement property as an improvement to an interior portion of a building that is nonresidential real property. So IRC 168(b)(2)(A) puts “any 15-year or 20-year property not referred to in paragraph (3)” on the 150 percent declining balance method, that bucket carries real additional depreciation and real ordinary section 1250(a) recapture, and a cost-segregation study on a residential rental produces it routinely. That 150 percent method is the default rather than a fixed rule: limb (D) of the straight-line list is itself a taxpayer election, and IRC 168(b)(5) lets it be made “with respect to 1 or more classes of property for any taxable year”, irrevocably, applying to everything in that class placed in service that year. Where the election was made on the class these assets sit in, they were on straight line after all, and on a more-than-a-year hold their additional depreciation is zero too. That doesn’t make them free: on the section 1250 reading above, the same up-to-25-percent unrecaptured 1250 gain still reaches the depreciation they did take. Cost segregation is common on short-term rentals run as a business, so check the fixed-asset schedule for both the lines and the elections.

Then what am I actually paying on the depreciation?

Unrecaptured section 1250 gain, and 25 percent is its ceiling rather than its rate. Section 1(h)(1) is conditional and framed as a limit: “If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of” its components, one of which is “25 percent of the … unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11)))” over a stated offset. No net capital gain for the year and there’s no 1(h) ceiling to apply. A lower ordinary bracket pays less.

Point of comparison	Section 1250 recapture	Unrecaptured section 1250 gain
Authority	IRC 1250(a)(1)(A)	IRC 1(h)(1)(E), defined at IRC 1(h)(6)(A)
Character	Ordinary income	Capital gain, expressly “not otherwise treated as ordinary income”
Amount on a straight-line residential rental building	Zero on a building held more than a year, because 1250(b)(1) narrows additional depreciation to the excess over straight line only for property held that long, and 168(b)(3)(B) makes straight line mandatory. Sell inside a year and additional depreciation is the whole of the depreciation, so the amount is not zero. Zero here also doesn’t mean no tax: the same depreciation is taxed at up to 25 percent in the next column. Property outside the modern section 168 regime, personal property a cost-segregation study reclassified into section 1245, and 15-year land improvements, which 168(b)(2)(A) puts on 150 percent declining balance by default unless straight line was elected for that class under 168(b)(5), sit outside this row.	The depreciation the 1(h)(6)(A) counterfactual picks up, taxed at up to 25 percent even in the ordinary case where the 1250(a) column reads zero. Section 1016(a)(2) cuts basis by the amount allowable whether or not you claimed it, so the gain is that much bigger. Whether the counterfactual itself must use the allowable figure, or may use the smaller amount allowed under 1250(b)(3), is unresolved on the text located.
Rate	Ordinary rates, but on a straight-line residential rental building held more than a year there is no additional depreciation for them to apply to, so the amount is zero and the same depreciation is taxed at up to 25 percent in the next column. On a hold of a year or less there is additional depreciation, and these ordinary rates reach it	25 percent maximum in a year with a net capital gain, because 1(h)(1) then says the tax “shall not exceed” its components, so a lower bracket pays less
Can it reach the lower long-term rates?	Not applicable	No, 1(h)(3)(A)(i) removes it from adjusted net capital gain, which is the base those lower rates run on
Ceiling on the amount	The gain on the section 1250 property itself, per 1250(a)(1)(A)(ii), which measures the amount realized against “the adjusted basis of such property”	Two of them, and Step 5 below uses the first. The 1(h)(6)(A) counterfactual leaves the 1250(a)(1)(A)(ii) limb alone, so the amount is still capped at the gain on the section 1250 property itself. Then, for amounts “from sales, exchanges, and conversions described in section 1231(a)(3)(A)”, 1(h)(6)(B) caps it again at the net section 1231 gain for the year

The definition is a counterfactual. IRC 1(h)(6)(A) builds unrecaptured section 1250 gain out of long-term capital gain, “not otherwise treated as ordinary income”, that would be ordinary income “if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent”. It asks what section 1250 would have caught without the straight-line carve-out, then taxes that as capital gain with a cap. Strictly it is an excess rather than a flat amount: that counterfactual figure at limb (i), reduced by a limb (ii) offset built from the 1(h)(4) components, being the amount by which the year’s collectibles loss, net short-term capital loss and long-term capital loss carryover together exceed its collectibles gain and section 1202 gain. A year with no other capital gains or losses puts nothing in that offset, which is why the worked example below runs on limb (i) alone.

Two consequences follow. IRC 1(h)(3)(A)(i) carves the amount out of adjusted net capital gain, so it can’t drop into the lower long-term buckets. And IRC 1(h)(6)(B) caps the amount from section 1231(a)(3)(A) sales at the net section 1231 gain for the year, which IRC 1231(c)(3) defines as section 1231 gains over section 1231 losses. So that cap tightens when you have a section 1231 loss in the same year, not when you have a second sale at a gain.

What if I never claimed depreciation on the property?

Your basis drops anyway, so the gain is bigger, and you can end up paying up to 25 percent on depreciation you never deducted. Ordinary section 1250(a) recapture is still zero on a building held more than a year, for the same reason as before and not because you claimed nothing. IRC 1016(a)(2) reduces basis “to the extent of the amount … allowed as deductions”, “but not less than the amount allowable under this subtitle or prior income tax laws”, which is a floor rather than a tally of what you claimed. Section 1016 fixes the size of the gain; the rate comes from section 1.

• The straight-line default makes the phantom figure computable. The flush language of 1016(a)(2) adds that “where no method has been adopted under section 167 …, the amount allowable shall be determined under the straight line method.”
• Section 1 characterises the gain, and section 1016 has no part in that. IRC 1(h)(6)(A) is what turns part of that gain into unrecaptured section 1250 gain, by re-running section 1250 as if “section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent”. So an owner who filed nothing and deducted nothing still shows zero ordinary 1250(a) recapture on a building held more than a year, and still carries the bigger gain the basis reduction produces. Whether the counterfactual then pulls that never-taken depreciation inside the 25 percent ceiling is the first of the two open questions below, though the worst case the text supports is up to 25 percent on all of it.

Two questions here are genuinely open, and both go to the amount rather than the rate.

• Which depreciation figure the counterfactual uses. IRC 1250(b)(3) defines the “depreciation adjustments” that 1250(b)(1) operates on as deductions “allowed or allowable”, then adds a taxpayer-favourable proviso: “if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.” Its own words confine that to “For purposes of the preceding sentence”, so it doesn’t reach section 1016 and can’t restore basis. But the 1(h)(6)(A) counterfactual changes only two things about section 1250, and 1250(b)(3) isn’t one of them. What has been located points both ways without settling it. Reg 1.1250-2(d)(4)(i) implements that proviso and names the single place it does not apply, “for purposes of computing under paragraph (b)(1)(ii) of this section the amount such deductions would have been under the straight line method”, which is exactly the leg the counterfactual removes, and Reg 1.1(h)-1(b)(3)(i) reproduces the counterfactual without disapplying 1250(b)(3) either. Running the other way, the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions builds the figure off Form 4797 line 22, “Depreciation (or depletion) allowed or allowable”, which is the 1250(b)(3) phrase with its proviso attached, and it addresses no owner who never filed. So the question is open rather than empty: no authority located reaches the 1(h)(6)(A) interaction directly.
• Whether depreciation is “allowable” at all for a year in which you had no effectively connected income, filed no US return, or would have run into IRC 873(a)‘s limit on a non-resident’s deductions. Nothing located resolves that either.

Model the full straight-line figure against the 25 percent ceiling, because that’s the worst case the text supports, then get the specific years reviewed rather than assuming either question breaks your way.

What do the numbers look like on a twelve-year hold?

Round numbers, one property, twelve years. The arithmetic is here to show that the section 1250(a) line comes out at zero and the tax bill does not, because the same depreciation reappears one line down at the 25 percent ceiling.

One owner got twelve years of deductions and faces up to $36,000. The other got nothing and, unless the allowed-versus-allowable question breaks their way, faces the same up to $36,000. That’s the most expensive misunderstanding on this topic.

Does being a non-resident change the 25 percent ceiling?

No differential rate was found, and that’s a deliberately careful way to put it. Read “non-resident” here as nonresident alien under IRC 7701(b)(1)(B), which is a status and not an address. Section 1(h) carries no residency qualifier anywhere, and IRC 897(a)(1) routes a non-resident’s gain on a US real property interest into section 871(b)(1), which makes that gain “taxable as provided in section 1 or 55”. Equal treatment here rests on silence plus routing, so read it as no differential located rather than a rule granting parity.

• The axis is status rather than address. IRC 7701(b)(1)(B) makes an individual “a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States …”. A Canadian who also holds US citizenship, or a green card, is not one, and the status-sensitive provisions here key to that status rather than to a Canadian address: 897(a)(1) and 63(c)(6)(B) both say “nonresident alien individual” in terms, and the section 1445 withholding below reaches a disposition “by a foreign person”. This page is written for the nonresident alien case.
• IRC 897(a)(2)(A) sets an alternative minimum tax floor that by its own terms applies only to a non-resident alien individual: the taxable excess for section 55(b)(1) “shall not be less than the lesser of” the individual’s alternative minimum taxable income or “net United States real property gain” for the taxable year. How it stacks against the 1(h) ceiling is unresolved here, so treat it as a floor to check rather than a figure to compute here.
• IRC 63(c)(6)(B) provides that for a non-resident alien individual “the standard deduction shall be zero”. No different rate schedule was located, and that zero changes bracket-fill mechanics rather than the 25 percent rate in the ceiling, though a higher taxable income shrinks the offset in 1(h)(1)(E)(ii) and can push more of the gain up against that ceiling.

That routing works even for a wholly passive owner who never made the section 871(d) election to treat US rental income as business income. Section 897 deems the gain effectively connected by itself, so the 25 percent ceiling is available on the sale whether or not the election was filed.

What about the FIRPTA tax withheld at closing?

IRC 1445(a) reaches a disposition of a US real property interest “by a foreign person” and requires the buyer to “deduct and withhold a tax equal to 15 percent of the amount realized on the disposition”. It opens “Except as otherwise provided in this section” and the exceptions sit in that same section, so 15 percent is the default rather than the only rate. Whatever gets withheld is a deposit against your US tax rather than the tax itself.

• IRC 1445(c)(4) applies subsection (a) “by substituting ‘10 percent’ for ‘15 percent’” on three conditions together: the property is “acquired by the transferee for use by the transferee as a residence”, the amount realized doesn’t exceed $1,000,000, and the disposition is one “to which subsection (b)(5) does not apply”.
• IRC 1445(b)(1) is what lifts the obligation altogether, saying “No person shall be required to deduct and withhold any amount under subsection (a)” where paragraph (5) applies, and (b)(5) supplies two conditions that have to hold together: the property is “acquired by the transferee for use by him as a residence”, and “the amount realized for the property does not exceed $300,000”. Either one alone does nothing. A sub-$300,000 sale to a buyer who will live in it is zero withholding; the same sale to an investor buyer is back at the 15 percent default, because the residence condition fails and (c)(4) needs it too.

So the rate turns on the buyer’s intended use and the price, neither of which the seller controls. Which rate you land on, getting it back, and the route for reducing it before closing belong to the guide on recovering FIRPTA withholding.

One boundary, and it matters. Every figure above is US tax on a nonresident alien seller, and US tax isn’t the whole picture for a Canadian resident selling US property. This page doesn’t price the Canadian side of the same disposition or any treaty relief. How to hold the property, the estate exposure, and what the exit costs sit in the corridor guide for a Canadian buying US property.

What should I do next?

Two moves before you sign. Keep two figures apart in your model: zero for ordinary section 1250(a) recapture on a building held more than a year, and the full depreciation amount against a 25 percent ceiling for the unrecaptured 1250 gain. Then pull the depreciation schedule for every year you owned it, including years you filed nothing, because IRC 1016(a)(2) builds basis out of what was allowable rather than what you claimed. Land improvements, and anything a cost-segregation study carved out, get computed on their own.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.