A Montauk landlord who bought a rental cottage in the early 2000s and finally lists it now is often shocked by two numbers at once: the sale price, reflecting two decades of East End appreciation, and the recapture bill, reflecting two decades of depreciation deductions that quietly reduced the tax bill every single year in between. The second number is the one most sellers never budgeted for, because it was never a check they wrote, only a benefit they took.
The Mechanics of Section 1250 Recapture
Residential rental property depreciates on a straight-line schedule, and every dollar deducted along the way lowers the property's basis by that same amount. At sale, the IRS treats the lesser of total depreciation claimed or total gain as recapture, taxed at a rate capped at 25 percent rather than at ordinary long-term capital gains rates. Whatever gain remains above that recaptured amount is then taxed at the standard long-term rate, assuming the holding period cleared a year, which stacks two federal calculations before New York's own tax even enters the picture.
A Montauk Cottage, Worked Through the Numbers
Say a cottage was purchased for 500,000 dollars and the owner claimed 130,000 dollars in depreciation over the holding period, dropping basis to 370,000 dollars. A sale at 750,000 dollars produces 380,000 dollars in total gain. The 130,000 dollars matching the depreciation claimed is taxed as recapture, capped at 25 percent; the remaining 250,000 dollars is taxed at long-term capital gains rates. These figures are illustrative only and won't match any actual East End transaction's numbers.
Why Long East End Holding Periods Compound the Bill
A rental held fifteen or twenty years in Amagansett or Springs accumulates depreciation on the same timeline that East End land and structure values have climbed, which means both halves of the equation, recapture and ordinary gain, grow together rather than offsetting each other. New York then taxes the ordinary gain portion as state income on top of the federal recapture and long-term rates, turning a single closing into three separate tax calculations landing at once.
Deferring the Bill Through an Exchange
A 1031 exchange defers recapture along with the underlying capital gains, provided the sale qualifies as investment or business-use property traded for a like-kind replacement, run through a qualified intermediary within the standard 45-day identification and 180-day closing windows. The recaptured depreciation doesn't disappear; it carries into the replacement property's basis and resurfaces if that property is later sold outright without another exchange. Owners ready to step back from hands-on East End landlording sometimes route the deferral into a passive DST allocation instead of sourcing a new property directly, which defers recapture the same way a direct purchase would.
Reconciling the Depreciation Schedule Before Listing
The recapture figure is only as reliable as the depreciation schedule filed each year of ownership, and a landlord who changed accountants mid-stream or missed a filing year can end up with a number that doesn't match what a CPA would expect for a property of that value. Sorting out the full schedule before a listing goes live, rather than after an offer lands, gives the seller time to correct gaps and arrive at a recapture figure that holds up under review. This matters even more on an East End property that changed hands within a family or through a prior 1031 exchange, since the depreciation schedule usually needs to be reconstructed across more than one owner's returns before a CPA can sign off on the final number.
Frequently Asked Questions
Is recapture the same as the ordinary long-term capital gains tax on my sale?
No. Recapture is a separate calculation applied specifically to the depreciation you claimed, capped at a 25 percent rate, while any gain beyond that is taxed at the standard long-term capital gains rate.
If I skip claiming depreciation while I own the rental, do I avoid recapture at sale?
No. The IRS calculates recapture based on depreciation you were entitled to claim, whether you actually claimed it or not, so skipping the deduction only costs you the benefit during ownership without avoiding the eventual tax.
Does a 1031 exchange defer the recapture portion, or only the capital gains portion?
Both are deferred together, since recapture is calculated as part of the total gain that carries into the replacement property's basis rather than being taxed at the time of the original sale.
My recapture number came back much higher than I expected on a property I've owned for two decades. Why?
Longer ownership generally means more cumulative depreciation was claimed, which directly increases the amount subject to recapture. Running the actual depreciation schedule with a CPA before listing avoids a surprise at closing.
Does New York apply a separate recapture tax on top of the federal one?
New York doesn't calculate recapture separately, but it taxes the remaining ordinary gain portion as state income, adding to the total on top of the federal recapture and long-term rates.
I only rented the cottage for a handful of years within a much longer ownership period. Is recapture still meaningful?
It can be, since recapture is tied to depreciation actually claimed during the rental years specifically, not to how those years compare to the total time the property was owned. Even a short rental stretch generates its own schedule that drives the recapture figure.
