Depreciation recapture is a 25% federal tax applied at sale on the total depreciation deductions claimed during ownership. A 1031 exchange defers both capital gains and depreciation recapture.
When you own LA multifamily, you typically depreciate the building (not the land) over 27.5 years. Those deductions reduce your income tax while you own it. At sale, the IRS "recaptures" that benefit by taxing the depreciation at 25% federal.
On a building where you've taken $900,000 in depreciation over 20 years, recapture tax at sale is $225,000 federal. California also taxes this as ordinary income.
For long-term LA multifamily owners, depreciation recapture is typically a larger tax exposure than capital gains on the appreciation portion. This is a significant reason 1031 exchanges remain attractive even for owners who have modest price appreciation — the deferred recapture alone often justifies the exchange mechanics.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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