Depreciation recapture can be a gut-punch when selling an investment property. You’ve taken all of those beneficial deductions, but the IRS wants a chunk of that back when you exit.

Fortunately, there are some legal strategies to avoid or reduce depreciation recapture. Some of these strategies include:

1031 Exchange

A 1031 exchange is a classic strategy to defer capital gains and depreciation recapture by rolling properties into a like-kind property. You could potentially kick the tax can down the road indefinitely if you keep doing exchanges or a step-up in basis later.

Just keep in mind that there are deadlines that must be met and other requirements. Working with a qualified intermediary is essential.

Purchase A New Property and Do a Cost Seg Study

Another potential option is to purchase an additional investment property and do a cost segregation study to offset the gains from the sale through bonus depreciation (if you qualify).

Reinvest in Opportunity Zones

If you invest your capital gains (including recapture) into a Qualified Opportunity Fund within 180 days, you may be able to defer the taxes until 2026. You could potentially eliminate those taxes if you hold onto the investment for long enough.

Convert the Property to Your Primary Residence

This strategy takes time and planning, but it may be an option if you know you’re going to sell the property in the next few years. If you convert the property to your primary residence for at least two out of the five years before selling, you might qualify for the Section 121 gain exclusion. You will still owe the recapture, but this strategy could reduce your overall gain significantly.

These are just a few strategies you can use. I’d love to know what’s worked best for you in minimizing depreciation recapture. Any hard lessons you’ve learned?