(617) 674-2043 advisors@mansardcre.com

Commercial Real Estate Tax Guide — Massachusetts & New Hampshire

Depreciation Recapture on Commercial Real Estate: The 25% Tax Most Owners Miss

Every year you owned your commercial property, you claimed depreciation deductions that reduced your taxable income. When you sell, the IRS collects — at a rate of up to 25%, regardless of how long you held the asset. Here is what you need to know before you list.

Schedule a Pre-Sale Strategy Call See Common Questions
25%
Max Federal Recapture Rate
39 yrs
Commercial Building Depreciation Life
$0
Recapture if Held to Death (Step-Up)
Deferred
Via 1031 Exchange

Informational only. Not legal or tax advice. Consult a qualified CPA before making decisions.

What Is It? How It's Calculated Rate Comparison Cost Segregation Warning Planning Strategies MA & NH Impact FAQ Work with MANSARD

Section 1

What Is Depreciation Recapture on Commercial Real Estate?

Every commercial property owner who has taken depreciation deductions faces a tax bill on exit that most people do not see coming until it is too late to plan around it. That bill is called depreciation recapture.

Here is the core principle: the IRS allows you to deduct a portion of your commercial building's value each year as a depreciation expense — reducing your taxable income during the holding period. Commercial real estate is depreciated over 39 years using the straight-line method. For a $1,000,000 building, that is approximately $25,641 per year in deductions.

When you sell the property at a gain, the IRS requires you to "recapture" those deductions — meaning the portion of your gain attributable to prior depreciation is taxed at a higher rate than standard long-term capital gains. This is governed by Section 1250 of the Internal Revenue Code.

The critical rule most owners miss: Depreciation recapture applies to the amount of depreciation that was "allowed or allowable" — meaning the depreciation you were entitled to claim, whether or not you actually claimed it. If you owned a commercial property for 10 years and never took depreciation deductions, the IRS will still recapture it at sale as if you had.
📋

This page covers depreciation recapture specifically. For a complete breakdown of all capital gains taxes affecting commercial property owners in Massachusetts and New Hampshire — including federal rates, the MA Millionaire's Tax, NIIT, and 1031 exchange strategy — read our full guide: Capital Gains Tax on Commercial Real Estate: MA & NH Guide →

Section 2

How Depreciation Recapture Is Calculated on a Commercial Property Sale

The calculation has three steps. Understanding each one is essential to accurately modeling your net proceeds before you go to market.

1

Calculate Total Depreciation Taken

Add up all depreciation deductions claimed on the property during your ownership. For a $1,000,000 commercial building held for 10 years: $25,641/year × 10 = $256,410 in total depreciation.

2

Determine Your Adjusted Basis

Subtract total depreciation from your original purchase price (plus capital improvements). If you paid $1,200,000 and took $256,410 in depreciation: adjusted basis = $943,590.

3

Split the Gain Into Rate Buckets

If you sell for $1,600,000, your total gain is $656,410. The first $256,410 (equal to depreciation taken) is taxed at the 25% recapture rate. The remaining $400,000 is taxed at the standard long-term capital gains rate of 15–20%.

Worked Example — $1.2M Commercial Building, 10-Year Hold

Item Amount Notes
Original purchase price$1,200,000Building value only (excluding land)
Total depreciation taken (10 years)$256,410$1,200,000 ÷ 39 years × 10
Adjusted basis$943,590Purchase price minus depreciation
Sale price$1,600,000
Total gain$656,410Sale price minus adjusted basis
Unrecaptured Section 1250 gain$256,410Taxed at 25% federal rate
Remaining long-term capital gain$400,000Taxed at 15–20% federal rate
Federal tax on recapture alone$64,103$256,410 × 25%
In this example, the depreciation recapture alone generates a $64,103 federal tax bill — before any capital gains tax, state tax, or NIIT. Most owners price their sale at the headline capital gains rate of 20% and are surprised to find the recapture layer adds tens of thousands of dollars to the final bill.

Section 3

How Depreciation Recapture Compares to Other Tax Rates

Understanding where the 25% recapture rate sits relative to your other tax obligations is essential for accurate net proceeds modeling.

Tax Type Federal Rate MA State Rate Notes
Depreciation Recapture (Sec. 1250) Up to 25% 5.0% (+ 4% if above $1,107,750) Applies to all straight-line depreciation taken
Long-Term Capital Gains 15% or 20% 5.0% (+ 4% if above $1,107,750) Applies to appreciation above depreciated basis
Net Investment Income Tax (NIIT) 3.8% N/A Applies to both recapture and LTCG for high earners
Section 1245 Recapture (cost seg components) Up to 37% (ordinary) 5.0–12.5% Applies to 5-year and 15-year cost seg assets
📖

For a complete breakdown of how the Massachusetts Millionaire's Tax interacts with your depreciation recapture exposure, see: Massachusetts Millionaire's Tax: What Commercial Property Owners Need to Know in 2026 →

Section 4

The Cost Segregation Warning: How Accelerated Depreciation Changes the Exit Math

Cost segregation studies are a powerful tax strategy — but they create a recapture liability that many owners do not model until it is too late.

A cost segregation study reclassifies portions of your commercial building — typically interior components, land improvements, and personal property — from 39-year straight-line depreciation into shorter-lived categories (5-year, 7-year, or 15-year assets). This accelerates your deductions significantly in the early years of ownership.

The critical difference on exit: assets reclassified as Section 1245 property (personal property components) are recaptured at ordinary income rates — up to 37% — not the 25% cap that applies to Section 1250 (the building structure). This means cost segregation can shift a portion of your future recapture from 25% to 37%.

Without Cost Seg

Standard Straight-Line Depreciation

All depreciation is Section 1250 property. Recapture is capped at 25% federal rate. Predictable, well-understood tax liability on exit. Lower upfront deductions but a cleaner exit.

With Cost Seg

Accelerated Depreciation (Cost Segregation)

Reclassified components become Section 1245 property. Those components are recaptured at ordinary income rates (up to 37%) on exit — not 25%. Higher upfront deductions, but a higher recapture rate on the reclassified portion. Must model the full exit before authorizing the study.

The rule of thumb: Cost segregation is most advantageous when you plan to hold the property long-term, do a 1031 exchange on exit, or hold until death (step-up in basis eliminates all recapture). If you plan to sell outright within 5–10 years, the recapture math may reduce or eliminate the net benefit of the study. Always model both sides of the trade before authorizing a cost segregation study.

Section 5

Four Strategies to Reduce or Defer Depreciation Recapture

Depreciation recapture is not unavoidable — but it requires planning that begins before the property goes to market. Here are the four most effective strategies available to commercial property owners in Massachusetts and New Hampshire.

Strategy 1

1031 Like-Kind Exchange

A properly structured 1031 exchange defers both the capital gains tax and the depreciation recapture tax entirely. Read our complete guide to 1031 exchanges for commercial real estate in MA & NH → The deferred recapture carries forward to the replacement property's basis. It is deferred — not eliminated — unless the property is held until death, at which point heirs receive a stepped-up basis that wipes out all deferred recapture. This is the "swap till you drop" strategy.

Strategy 2

Installment Sale

An installment sale spreads the recognition of gain across multiple tax years. However, there is a critical catch: under IRS ordering rules, the unrecaptured Section 1250 gain is recognized first in an installment sale — before the long-term capital gain. You cannot spread the 25% recapture layer proportionally. Model the cash flow carefully before structuring a seller-financed deal.

Strategy 3

Hold to Death (Step-Up in Basis)

If the plan is to hold the property until death, the recapture problem dissolves entirely. Heirs receive a stepped-up basis equal to the property's fair market value at the date of death — wiping out all accumulated depreciation and the associated recapture liability. This is the most complete solution, but requires estate planning coordination.

Strategy 4

Opportunity Zone Investment

Unrecaptured Section 1250 gain qualifies as eligible gain for Opportunity Zone (QOZ) deferral under Section 1400Z-2. A qualifying 10-year hold in a QOZ investment can result in a stepped-up basis on the QOZ investment itself. Legislative changes under OBBBA are evolving — consult a qualified advisor before committing to a QOZ structure.

The key principle: None of these strategies can be implemented after the sale closes. The planning window is before the property goes to market. Every month without a strategy is a month the IRS is making decisions for you.

Section 6

How Depreciation Recapture Affects Sellers in Massachusetts & New Hampshire

The federal recapture rate is the same regardless of where your property is located — but the state tax layer on top of it varies significantly between Massachusetts and New Hampshire.

Tax Layer Massachusetts New Hampshire
Federal Recapture (Sec. 1250) Up to 25% Up to 25%
State Capital Gains Tax on Recapture 5.0% (long-term) up to 9.0% with Millionaire's Tax None (no state capital gains tax)
NIIT (if applicable) 3.8% 3.8%
Max Combined Rate on Recapture ~37.8% (federal + MA + NIIT) ~28.8% (federal + NIIT only)

For Massachusetts sellers, the depreciation recapture layer is particularly costly because it is subject to both the standard 5% Massachusetts capital gains rate and potentially the 4% Millionaire's Tax surtax if total taxable income exceeds $1,107,750 in 2026. The combined effective rate on the recaptured portion can approach 38% for high-income sellers.

For New Hampshire sellers, the absence of a state capital gains tax means the recapture is taxed only at the federal rate (up to 25%) plus NIIT — a meaningful advantage over Massachusetts that makes the 1031 exchange and installment sale strategies even more attractive. Read our full guide to selling commercial property in New Hampshire →

Frequently Asked Questions

Depreciation Recapture on Commercial Real Estate: Common Questions

Depreciation recapture is an IRS rule that requires you to pay tax on the depreciation deductions you claimed during your ownership when you sell a commercial property at a gain. The portion of your gain attributable to prior depreciation is taxed at a maximum federal rate of 25% — higher than the standard long-term capital gains rate of 20%.
For commercial real estate (Section 1250 property), the unrecaptured depreciation is taxed at a maximum federal rate of 25%. In Massachusetts, this gain is also subject to state capital gains tax (5%, up to 9% with the Millionaire's Tax) and potentially NIIT (3.8%). The combined effective rate can approach 38% for high-income Massachusetts sellers.
Yes. The IRS applies depreciation recapture on the amount of depreciation "allowed or allowable" — meaning the depreciation you were entitled to claim, whether or not you actually claimed it. If you owned a commercial property and did not take depreciation deductions, the IRS will still recapture it at sale as if you had.
Yes. A properly structured 1031 like-kind exchange defers both the capital gains tax and the depreciation recapture tax. The deferred recapture carries forward to the replacement property's basis. It is deferred — not eliminated — unless the property is held until death, at which point heirs receive a stepped-up basis that wipes out the deferred recapture.
In Massachusetts, depreciation recapture is subject to both federal tax (up to 25%) and Massachusetts state capital gains tax (5% for long-term gains, up to 9% if the Millionaire's Tax applies). Combined with NIIT, the total effective tax rate on the recaptured portion can exceed 35% for high-income Massachusetts sellers.
Section 1245 applies to personal property and equipment (including cost segregation components like 5-year and 15-year assets) and is taxed at ordinary income rates — up to 37%. Section 1250 applies to the building structure itself and is capped at 25% for post-1986 commercial property. Cost segregation studies can shift depreciation from Section 1250 to Section 1245, increasing future recapture rates.

Work with MANSARD

Model Your Full Tax Exposure Before You Decide to Sell

Depreciation recapture is one of the most commonly overlooked costs in a commercial property sale — and one of the most expensive to discover after the fact. At MANSARD, we help owners understand the full picture before anything goes to market.

While we do not provide legal or tax advice, we work closely with your CPA and legal team to ensure your real estate strategy accounts for your full tax exposure — including recapture, capital gains, and state-level liabilities. We help you model net proceeds across multiple scenarios and determine whether selling now, holding, exchanging, or using an installment structure is the right move.

  • Know your adjusted basis and total depreciation taken before you price the asset
  • Model net proceeds across sale, 1031 exchange, and installment scenarios
  • Identify the right buyers who will pay the most and close with confidence
  • Build a strategy that protects the capital you have spent years creating

Schedule a Pre-Sale Strategy Call

A short, confidential conversation to understand your property's value, your full tax exposure, and what your best move actually is — before you commit to anything.

Schedule a Pre-Sale Strategy Call Call (617) 674-2043

Confidential. No obligation. Just insight.

Disclaimer: This content is provided for informational purposes only and does not constitute legal, tax, or financial advice. Tax laws are subject to change. Please consult a qualified CPA or tax advisor regarding your specific situation before making any decisions related to the sale of commercial real estate.

Sources: IRS Publication 544, Sales and Other Dispositions of Assets (2025). The Real Estate CPA, "Section 1250 Recapture Explained" (May 2026). McLane Middleton, "Real Estate Tax Considerations in New Hampshire" (December 2025). Massachusetts Department of Revenue, 4% Surtax guidance (2026 threshold: $1,107,750).

MANSARD Commercial Properties · 18 Spring Grove Road, Andover, MA 01810 · (617) 674-2043 · masscommercialproperties.com
Jeremy Cyrier, CCIM, CRE — Licensed in Massachusetts and New Hampshire.