A landlord who has rented out a Mid-City double for eight years and finally decides to sell usually expects one tax bill. There are actually two components hiding inside it: ordinary capital gains tax on the appreciation, and depreciation recapture on the deductions claimed every year the property was rented. Both get calculated separately, and both land in the same closing statement.
How the Gain Gets Calculated
The taxable gain starts with the sale price, minus selling costs, minus the property's adjusted basis. Adjusted basis is the original purchase price plus qualifying improvements, minus total depreciation claimed over the holding period. A rental that has been depreciated every year has a lower adjusted basis than the sticker price suggests, which is part of why the taxable gain on a long-held rental often surprises the owner.
Long-term capital gains rates apply if the property was held more than a year, which almost every rental sale qualifies for. Short-term gains, taxed as ordinary income, only come up when a property is flipped quickly, which is a different situation than a standard landlord exit.
Depreciation Recapture on Top of the Gain
The portion of the gain attributable to depreciation already claimed is taxed separately under depreciation recapture rules, generally at a rate capped at 25 percent for real property, regardless of the owner's regular capital gains bracket. This applies whether or not the owner actually claimed the depreciation each year, since the IRS calculates recapture on what was allowed, not just what was taken.
An owner who never filed depreciation schedules properly on a Gentilly or Algiers rental should talk to a CPA before assuming recapture does not apply. It generally still does, and skipping the deduction over the years does not avoid this piece of the bill.
What Improvements and Repairs Do to the Number
Capital improvements, a new roof, a rebuilt HVAC system, a full kitchen renovation, add to basis and reduce the taxable gain. Routine repairs, patching drywall, repainting, fixing a leak, do not. Landlords who kept receipts for major work over the years, especially post-storm rebuild work common across the city, usually end up with a meaningfully lower gain than they expected once those costs are added back into basis.
Deferring the Bill With a 1031 Exchange
Because a rental is investment property, it is eligible for a 1031 exchange, which defers both the capital gains portion and the depreciation recapture portion of the tax, rolling everything into the replacement property's basis instead of paying it at closing. This is the main lever available to a landlord who wants to sell out of an aging Uptown rental without writing a check to the IRS the same year, as long as the proceeds go into another qualifying investment property on the standard 45-day and 180-day clock.
It does not apply if the landlord intends to keep the cash rather than reinvest it, and it does not apply to a property that was ever used as the owner's personal residence for a meaningful stretch without also being rented.
Common 1031 Exchange Questions
Is depreciation recapture a separate tax from capital gains on a rental sale?
Yes. It is calculated separately, generally capped at a 25 percent rate on the portion of the gain attributable to depreciation already claimed, on top of the ordinary long-term capital gains rate applied to the rest of the gain.
Does depreciation recapture apply even if the owner never deducted depreciation?
Generally yes. The IRS calculates recapture on the depreciation the owner was allowed to claim, not only what was actually claimed, so skipping the deduction does not avoid this part of the tax.
Do post-storm rebuild costs on a rental property reduce the taxable gain?
Capital improvements, including major rebuild work after storm damage, generally add to the property's basis and reduce the taxable gain, provided they were improvements rather than routine repairs.
Can a landlord defer capital gains and depreciation recapture together?
A properly structured 1031 exchange defers both components together, since the entire gain, not just one part of it, rolls into the replacement property's basis rather than becoming taxable at the sale.
What holding period qualifies a rental sale for long-term capital gains rates?
More than one year of ownership. Rentals held longer than that qualify for long-term rates, which are lower than the ordinary income rates applied to short-term gains on quickly resold property.
