FIRPTA and Cost Segregation Recapture on a Vacation Rental Sale

By Yarik Yarosh, CPA ·August 27, 2026 ·Updated September 23, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) August 27, 2026 · FL CPA license AC61704 · CPA Ontario

FIRPTA withholds 15% of the sale price at closing, but a vacation rental that used cost segregation and bonus depreciation can owe more than 15% in actual tax, because the reclassified personal property comes back as ordinary income at your marginal rate, not capital gain. A vacation rental that has been through a cost segregation study with bonus depreciation creates a different recapture profile than a standard long-term rental depreciated on the straight-line method. The general depreciation recapture mechanics (zero ordinary recapture under section 1250(a) on a straight-line building held more than a year, up to 25% on the unrecaptured section 1250 gain) still apply to the building component. But the personal property that a cost seg study reclassifies (appliances, carpet, cabinetry, lighting, certain electrical and plumbing) is IRC 1245 property, and section 1245 recapture is ordinary income at your marginal rate, not capital gain at a 25% ceiling. When bonus depreciation has been claimed at 100%, the entire cost of those reclassified components comes back as ordinary income on sale.

✓Key takeaway

On a vacation rental that used cost segregation and bonus depreciation, three layers of gain stack on sale. The building component carries unrecaptured section 1250 gain at up to 25% under IRC 1(h)(1)(E). Personal property reclassified by the cost seg study carries section 1245 recapture at ordinary rates under IRC 1245(a)(1). And any remaining gain above both recapture layers is capital gain at the regular long-term rates. The FIRPTA withholding under IRC 1445 is 15% of the total amount realized, which on a property with heavy cost seg may be less than the actual tax liability, because the ordinary-rate recapture on the 1245 components can exceed 15%. The Form 8288-B withholding certificate process (application fee $1,510, processing time approximately 90 days) lets you reduce the withholding to the estimated actual tax, but it must be filed before closing.

Why does cost segregation make the recapture worse?

A cost segregation study reclassifies building components from 27.5-year residential rental property to shorter-lived classes (5-year, 7-year, 15-year). The reclassified personal property (appliances, carpet, cabinetry, lighting, certain electrical and plumbing) is IRC 1245 property. Section 1245 recapture treats the full depreciation as ordinary income at your marginal rate, with no 25% ceiling and no straight-line carve-out, unlike the unrecaptured 1250 gain on the building.

With 100% bonus depreciation (now permanent under the Big Beautiful Bill Act), every dollar reclassified to a shorter-lived class was expensed in year one, so the entire amount comes back as ordinary income on sale
On a $500,000 condo where a cost seg study reclassified $100,000 to 5-year and 7-year property, the entire $100,000 returns at your marginal rate because the adjusted basis is zero after bonus depreciation
This is materially worse than the building component’s recapture, which is capped at 25% under the unrecaptured section 1250 gain rules

How do the three layers stack on a sale?

The gain from selling a cost-seg’d vacation rental separates into three components, each taxed differently.

Layer 1: Section 1245 recapture (ordinary income). The personal property components reclassified by the cost seg study. The recapture amount is the lower of the depreciation taken (the full cost if 100% bonus depreciation was claimed) or the gain on those specific assets. This layer is taxed at ordinary graduated rates on your 1040-NR.
Layer 2: Unrecaptured section 1250 gain (25% ceiling). The building component, depreciated on the mandatory straight-line method. On a building held more than a year, ordinary section 1250(a) recapture is zero because there is no excess depreciation above straight line. But the depreciation comes back as unrecaptured section 1250 gain under IRC 1(h)(1)(E), capped at 25%. This layer equals the total straight-line depreciation taken on the building component over the holding period.
Layer 3: Long-term capital gain (regular rates). Whatever gain remains after layers 1 and 2 is capital gain taxed at the regular long-term capital gains rates (0%, 15%, or 20% depending on the bracket, plus the 3.8% net investment income tax if applicable).

Hypothetical example

A Canadian resident bought a Florida vacation rental for $600,000 in 2024 (building $440,000, land $160,000). A cost segregation study reclassified $110,000 to 5-year and 7-year property (section 1245). Bonus depreciation at 100% was claimed on the $110,000 in year one. The remaining building ($330,000) was depreciated straight-line over 27.5 years (approximately $12,000 per year). After 5 years, the property sells for $750,000.

Total depreciation taken: $110,000 (bonus on 1245 components) + $60,000 (5 years of straight-line on the building) = $170,000. Adjusted basis: $600,000 minus $170,000 = $430,000. Total gain: $750,000 minus $430,000 = $320,000.

Layer 1 (section 1245 recapture): $110,000, taxed at ordinary rates. At a 32% marginal rate on effectively connected income, this is $35,200.

Layer 2 (unrecaptured section 1250 gain): $60,000, taxed at up to 25%. Maximum tax: $15,000.

Layer 3 (remaining capital gain): $320,000 minus $110,000 minus $60,000 = $150,000, taxed at 20% (top long-term rate for a nonresident alien with this level of gain). Tax: $30,000.

Total US tax: approximately $80,200. FIRPTA withholding at 15% of the $750,000 amount realized: $112,500. The withholding exceeds the tax in this example, so the seller files a 1040-NR to claim a refund of approximately $32,300.

Without cost segregation: the same property depreciated entirely on straight-line would have $80,000 of total depreciation over 5 years (all on the building), an adjusted basis of $520,000, and a total gain of $230,000. Layer 1 is zero (no 1245 property). Layer 2 is $80,000 at up to 25% ($20,000). Layer 3 is $150,000 at 20% ($30,000). Total US tax: approximately $50,000. The cost seg saved $46,000 in tax during the hold (the year-one bonus deduction at a 32% rate) but added approximately $30,200 in recapture tax on sale. The net benefit is approximately $15,800 plus the time value of the deferred tax.

Illustrative numbers only, not a real client and not advice for your facts.

When does FIRPTA withholding fall short of the tax?

The standard FIRPTA withholding under IRC 1445(a) is 15% of the amount realized (the sale price, not the gain). On a property with heavy cost segregation and a short hold, the actual tax can exceed 15% because section 1245 recapture reaches ordinary rates up to 37%. The reverse also happens: on an appreciated property, the 15% withholding can exceed the actual tax.

The mismatch is largest when the property has not appreciated much but carries significant cost-seg depreciation to recapture (the tax exceeds the withholding)
A property purchased for $500,000 and sold for $520,000 with $120,000 of depreciation has a $140,000 gain but $78,000 of withholding (15% of $520,000), far exceeding any plausible tax
In either direction, the seller files a 1040-NR to reconcile; refunds typically take 6-12 months for NRA filers

How does the 8288-B withholding certificate work?

Form 8288-B is an application to the IRS to reduce the FIRPTA withholding to an amount that more closely approximates the actual tax. The application requires a calculation of the estimated gain and tax, broken down by component (1245 recapture, unrecaptured 1250 gain, capital gain). The IRS reviews the application and issues a withholding certificate specifying the reduced amount.

The application must be filed before closing, because the IRS will not reduce withholding retroactively.

Processing time is approximately 90 days from date of receipt
The application fee is $1,510 (2025 user fee schedule under Rev. Proc. 2025-1), payable with the application
An ITIN is required; if the seller does not yet have one, the ITIN application must be filed simultaneously or in advance
On a $750,000 sale where the actual tax is $80,000 and the standard withholding is $112,500, the 8288-B saves $32,500 of cash tied up until the refund arrives; on a $300,000 sale where the difference is $5,000, it is not worth the fee

What happens on the Canadian side of the sale?

Canada taxes the same gain, with its own calculation. The ACB is computed in Canadian dollars at the purchase-date exchange rate, and proceeds are converted at the sale-date rate. Capital gains are included at 50% inclusion (the 2024 budget’s proposed two-thirds rate was cancelled in March 2025). The US tax paid (actual tax, not withholding) is creditable against Canadian tax through Form T2209.

Cost segregation complicates the Canadian side because Canada has no equivalent concept; CCA classes do not align with US recovery periods, and bonus depreciation has no Canadian match
If CCA was claimed on the T776, recapture under subsection 13(1) applies when proceeds exceed the UCC of the class
The foreign tax credit calculation requires matching US and Canadian characterization of each gain component; a character mismatch (US ordinary recapture vs. Canadian capital gain on the same asset) can leave stranded US credits

What should I do next?

If you own a vacation rental with cost segregation and are considering selling, run the three-layer calculation before listing. The 1245 recapture is fixed (it equals the bonus depreciation claimed, regardless of sale price), so layer 1 can be calculated today. Layer 2 depends on the holding period, and layer 3 depends on the expected sale price.

Compare the estimated tax to the 15% FIRPTA withholding and decide whether the 8288-B application is worth the fee and lead time
Start the ITIN process early if you do not already have one, because both the 8288-B and the 1040-NR require it
For the full compliance picture during the hold, read the snowbird Airbnb tax guide; for the ownership structure analysis, read the STR holding structure comparison

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Cite this page

Yarik Yarosh, CPA. "FIRPTA and Cost Segregation Recapture on a Vacation Rental Sale." Blue Cloud CPA, August 27, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/firpta-vacation-rental-depreciation-recapture-cost-seg

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