Capital Gains eCourse > Lesson 2
A Deep Dive into Capital Gains and Depreciation Recapture
Lesson 2 of 15 · About a 3-minute read · By Lane Kawaoka, PE · Updated November 2026 · Course home
Short answer
Capital gains tax applies to the profit when you sell. Gains on assets held more than a year get long-term capital gains rates; shorter holds are taxed as ordinary income. On real estate, the depreciation you claimed is taxed when you sell, as unrecaptured Section 1250 gain at up to 25%.
Understanding Capital Gains and Depreciation Recapture in Real Estate
In this video, we break down the fundamentals of:
1. Capital gains in real estate, explaining how profits from property sales are taxed
2. Differences between short-term and long-term capital gains taxes
3. Concept of depreciation recapture, including the types of depreciation and how they affect your taxes when you sell a property.
I’m not a CPA (we can refer you) I’m a real estate investor with over 2B of assets who uses these best practices actively. I started in 2009 with my little rental property in Seattle which we will refer to as a real life working example.
Capital gains in plain English. Think of it as the profit you make when your property’s value goes up from what you bought it for. Like, buy at $500k, sell at $750k, and boom – you’ve got a $250k capital gain.
We’ve talked about this on our podcast, so some of you might be nodding along already.
Short vs. Long Term Gains: Know the Difference
Short-term gains get taxed like your regular income, anywhere from zilch to 37%. Ouch. But if you can hang onto your property just a bit over a year, you’ve hit the long-term gain territory. Taxes drop to 0%, 15%, or 20% – much friendlier, right?
Depreciation Recapture: The Sneaky Tax
This one’s a bit trickier. When you sell, the tax man wants that depreciation you claimed, back. There are two flavors: straight-line and accelerated (bonus depreciation included). Without going full CPA mode, just know it’s all about how fast you claimed that depreciation and what happens when you sell dictates how my you have depreciated the asset during your hold and how much you have to give back when you sell.
Back in 2015, when I owned 11 rental properties and was transitioning into syndications and private placements—what I describe in my book as moving from the first to the second floor of the wealth elevator—I made the decision to sell off those properties. This meant I had to deal with capital gains and depreciation recapture. In 2016, I sold seven of the 11 properties, resulting in $250,000 in capital gains and depreciation recapture—a significant tax hit. However, because I had already been investing in syndications and private placements, I had accumulated passive losses that I could carry over and use to offset that quarter-million-dollar gain, effectively eliminating my tax liability. This is what I refer to as the “lazy 1031 exchange,” which you’ll hear more about as we go on. You’ll often hear about the 1031 exchange concept, but I think its obsolete and often over sold by 1031 salespeople. In fact, I did a 1031 exchange in 2012 when I sold three units in Seattle and bought nine units in the Midwest, but now I completely regret it. I’ve since learned about other strategies, which we’ll dive into in the upcoming sections.
Depreciation’s a double-edged sword. It can slice your tax bill now but might sting later when you sell. However, remember the golden rule: a dollar saved today beats a dollar tomorrow. Depreciation lets you reinvest savings for bigger wins down the road.
Now, let’s tackle the elephant in the room – how to soften the blow of capital gains and depreciation recapture when selling.
Key takeaways
- Your holding period decides short-term or long-term treatment.
- Depreciation lowers your basis, which raises your taxable gain at sale.
- Recaptured depreciation on real estate is taxed at up to 25% federally.
Related reading from the blog
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