Selling a Florida Rental: The Depreciation Recapture Tax Bill Landlords Forget

The Tax Bill That Surprises Even Experienced Landlords

Vince is 61, he owns a duplex in Daytona Beach, and he has been a careful landlord since 2014. He kept the units occupied, repaired what needed repairing, and claimed his depreciation deduction every single year, just as his accountant told him to. When he decided to sell in 2026, he ran a quick mental calculation: sale price minus what he paid, multiply by something around 15 percent, and he figured he knew roughly what he owed. He was wrong by tens of thousands of dollars.

What Vince encountered is one of the most reliably surprising tax events in real estate. Depreciation recapture sits quietly in the background for years, growing with every Schedule E deduction, and then it surfaces at closing. This guide explains how the mechanism works, walks through Vince's numbers in plain language, and covers the options available before or instead of a straight sale. (Vince is a composite, not a client, used here to illustrate how the rules apply in practice.)

This series already covers the capital gains basics and the primary-residence exclusion, so this article focuses entirely on the recapture layer that rental owners face on top of ordinary gain.

What Depreciation Recapture Actually Means

When you own a residential rental property, the IRS lets you deduct a portion of the building's cost each year as depreciation, spread over 27.5 years under the standard straight-line method. That deduction reduces your taxable income during ownership. When you sell, the IRS collects on the benefit you received. It taxes the total depreciation you claimed, or were entitled to claim, at a maximum federal rate of 25 percent. That recovery is called unrecaptured Section 1250 gain.

Two words in the previous sentence deserve special attention: "or were entitled to claim." The IRS applies what practitioners call the "allowed or allowable" rule. If you forgot to take depreciation in some years, or chose not to, the agency still treats those deductions as if you took them. Your adjusted basis is reduced regardless, and recapture is calculated on the full amount. Thinking you can skip depreciation to avoid recapture later is one of the more costly misconceptions in residential investing.

There is a second category worth knowing. If you used a cost segregation study to accelerate depreciation on personal property inside the rental, things like appliances, flooring, fixtures, and built-in equipment, that depreciation falls under Section 1245 and is recaptured as ordinary income at rates that can reach 37 percent. Vince did not pursue cost segregation, so his situation involves only the Section 1250 category, capped at 25 percent. But investors in Port Orange, Palm Coast, or DeLand who have used cost segregation should plan for that higher ordinary-income layer as well.

Vince's Numbers: Adjusted Basis and the Two-Layer Gain

Here is how Vince's sale breaks apart. The Zillow Home Value Index placed the typical Daytona Beach home value at $253,000 in July 2026. Vince's duplex is a larger income-producing asset, so for illustration purposes the article uses a sale price and purchase price consistent with a modest investment duplex in that market. The actual figures in any real transaction must come from the closing statement and the seller's tax records.

In general terms, the calculation works like this:

• Original purchase price: Vince paid a stated amount for the duplex in 2014. Only the building value, not the land, is depreciable.
• Total depreciation taken over 12 years: Using the 27.5-year straight-line method on the building's allocated value, Vince deducted a fixed amount each year. After 12 years, those deductions add up to a meaningful sum.
• Adjusted basis: Original cost minus accumulated depreciation. Because depreciation reduces basis, the adjusted basis after 12 years is substantially lower than what Vince paid.
• Gain at sale: Sale price minus adjusted basis. This total gain is then split into two portions: the amount equal to total depreciation taken (the recapture layer) and any remaining gain above the original cost (the capital gain layer).

To put concrete shape on it: if Vince paid $180,000 for the duplex in 2014, allocated $150,000 to the building and $30,000 to land, and claimed approximately $5,455 in depreciation per year ($150,000 divided by 27.5), he would have accumulated roughly $65,000 in total depreciation over 12 years. His adjusted basis would be approximately $115,000. If he sells for $300,000, his total gain is approximately $185,000. Of that, $65,000 is the recapture layer taxed at up to 25 percent federally. The remaining $120,000 is long-term capital gain taxed at 0, 15, or 20 percent depending on his income.

At a 25 percent recapture rate, the federal tax on that $65,000 layer alone is approximately $16,250, before the capital gain tax is even applied. That is the number that surprised Vince.

The 3.8 Percent Surtax Question

Vince also needs to ask whether the net investment income tax applies to his sale. In general terms, a federal surtax of 3.8 percent applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds a threshold (currently $200,000 for single filers and $250,000 for married couples filing jointly). Rental income and gain from the sale of rental property can both count as net investment income. Whether Vince clears the threshold depends on his total income picture for the year, including the gain from this sale, which is exactly why a CPA needs to model the numbers before closing, not after.

This surtax applies on top of both the recapture tax and the capital gain tax. For a seller in the Daytona Beach or Ormond Beach market whose income spikes in the year of sale, it can add thousands of dollars to the final bill.

Florida's Side of the Ledger

Here Vince gets a genuine break. Florida has no state income tax, no state capital gains tax, no estate tax, and no inheritance tax. Every dollar of recapture tax and capital gain tax is a federal obligation only. That is one reason the Volusia County rental market, from Daytona Beach down through Port Orange and across to DeLand, remains attractive to investors who sell in state rather than relocating to a higher-tax jurisdiction.

Florida does impose a documentary stamp tax on the deed at 70 cents per $100 of consideration in every county except Miami-Dade. On a $300,000 sale that is $2,100, typically paid by the seller under standard contract terms in this area. Understanding those closing costs alongside the tax bill is important for net-proceeds planning, and the full breakdown of seller closing costs is covered separately in this series.

The 1031 Exchange Alternative

Vince's situation raises the question that many long-term landlords eventually face: is there a way to defer these taxes rather than pay them all at once? The answer is yes, through a properly structured 1031 exchange, provided the rules are followed precisely. The exchange must be set up before closing, not after, the replacement property must be identified and acquired within strict federal deadlines, and the exchange must be handled through a qualified intermediary. Our guide to 1031 exchange deadlines and mechanics covers the timeline requirements in detail. A 1031 is not a tax elimination, it is a deferral, but for a seller staring at a $16,000 recapture bill plus capital gain taxes, deferral can be a powerful tool for preserving capital and redeploying it into a larger or better-positioned asset in New Smyrna Beach, Palm Coast, or elsewhere in Florida.

What This Meant for Vince

When Vince sat down with his CPA before listing the duplex, the actual numbers clarified quickly. The recapture layer on 12 years of depreciation, taxed at 25 percent federally, was the largest single tax item in his sale. The long-term capital gain on the remaining appreciation was taxed at a lower rate, but his total income for the year, boosted by the gain itself, pushed him close enough to the net investment income threshold that the 3.8 percent surtax required careful review. Florida owed him nothing in state tax, which helped.

Vince ultimately decided to sell outright rather than pursue a 1031, because he wanted liquidity in retirement and had no desire to manage another property. But he made that decision with accurate numbers in front of him, not the rough estimate he started with. He netted meaningfully less than his initial mental math suggested, not because anything went wrong with the sale, but because 12 years of tax deductions had to be partially repaid at closing. Knowing that in advance let him price the property correctly, plan his withholding, and avoid a painful surprise when he filed in April.

If you own a rental property in Daytona Beach, Ormond Beach, Port Orange, DeLand, New Smyrna Beach, or Palm Coast and you are thinking about selling, the recapture conversation needs to happen before you list, not at the closing table. I work alongside your CPA and can help you think through pricing, timing, and whether a 1031 makes sense for your situation. Please have your own CPA or tax professional run the actual numbers on your specific property.

Ready to Talk Through Your Rental Sale?

Arthur Simpson, Esq., CIPS is an Attorney and REALTOR® with Realty Pros Assured in Ormond Beach. He brings both legal and real estate perspective to investment property transactions across Volusia County and the surrounding region. Visit arthursimpson.com to explore the full series of guides on Florida real estate taxes and costs, or reach out directly to start the conversation about your property.