Depreciation recapture is the IRS collecting on the deductions you took. Every dollar of depreciation reduces your basis in the property, so when you sell, that reduction shows up again as gain. Cost segregation does not change that arithmetic. It changes when you get the deduction and, just as important, what rate applies when the deduction comes back.
The three layers of gain after a cost segregation study
When a cost-segregated property sells at a gain, the gain splits into layers. First, gain allocated to the 5- and 7-year personal property components, carpet, appliances, millwork, dedicated electrical, is ordinary income under IRC section 1245, up to the depreciation claimed on those assets. Second, the straight-line depreciation taken on the building shell comes back as unrecaptured section 1250 gain, taxed at a maximum of 25 percent under IRC section 1(h)(6). Third, anything above the original purchase price is regular long-term capital gain at 15 or 20 percent.
15-year land improvements sit in between. They are section 1250 real property, but because MACRS depreciates them on the 150 percent declining balance method, and bonus depreciation front-loads even more, the excess over straight line is recaptured as ordinary income under IRC section 1250. The slice that matches straight line stays in the 25 percent unrecaptured 1250 bucket.
Deferral, not forgiveness, but not a wash either
Accelerating depreciation does not create tax that would not otherwise exist; it moves deductions forward. Three things keep the trade favorable for most holders. The deduction offsets ordinary income at rates up to 37 percent, while the largest recapture layer, the building's straight-line depreciation, comes back capped at 25 percent. The section 1245 layer is ordinary, but it applies only to the extent gain is actually allocated to those components at sale, and used carpet and 8-year-old appliances rarely command much of the price. And every year between the deduction and the sale is a year the deferred tax works for you instead of the Treasury. With OBBBA making 100 percent bonus depreciation permanent for qualified property acquired after January 19, 2025, the first-year side of this trade is as large as it has ever been.
Exits that change the answer
Recapture only lands if you sell in a plain taxable sale. A 1031 exchange rolls the gain, and the recapture potential, into replacement property. Holding until death steps basis up under IRC section 1014 and erases the recapture entirely. A partial asset disposition during a renovation writes off components before they can ever be recaptured.
Amadae's cost segregation screen models the first-year benefit next to the recapture exposure for your expected hold, and the returns Amadae prepares carry the asset detail so the Form 4797 split is right when you do sell. The screen is a screening estimate, not an engineering study, but it shows both sides of the trade before you commit to anything.