At 70 He’ll Sell the Rental House He’s Owned Since 2004. The Depreciation He Never Bothered to Claim Will Still Be Taxed, Because the IRS Counts What He Could Have Taken
He skipped every depreciation deduction for two decades, assuming that meant nothing to repay when he finally sold. The IRS has a different definition of what he took.
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Picture someone who is 70 and has owned his rental house since 2004. As it stands, he figures the sale will be clean. He never claimed depreciation, so he thinks there’s nothing to pay back. That assumption could cost him tens of thousands of dollars.
Depreciation is the annual tax write-off landlords get for a building’s wear and tear. The tax code spreads a residential rental’s building cost (land excluded) over 27.5 years. When the house sells, the law reduces its cost basis (what the house counts as having cost him, for tax purposes) by depreciation “allowed or allowable”. That means whatever he was entitled to take, whether he took it or not. IRS Publication 551 puts it bluntly: “If you didn’t take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken.”
Plenty of sellers get caught by this. On an Intuit (NASDAQ:INTU | INTU Price Prediction) forum for tax pros, one preparer described a client who sold a rental in 2024 and said the adjusted basis had to include “the depreciation taken and not taken.” The timing matters too. The Case-Shiller national home price index stands at 336.7, just under its July 2026 peak, so long-held rentals carry big gains.
What a 2004 Rental Actually Owes at Sale
Here are the assumptions, all of which are hypothetical: he paid $300,000, with $60,000 for land, leaving a $240,000 building. He rented it for about 22 years, made no improvements, and cleared $550,000 after selling costs. He and his wife file jointly with $100,000 of other income, and they live in a state with only federal income tax.
| Item | Amount |
|---|---|
| Depreciation he could have taken each year | About $8,727 |
| Total allowable depreciation | $192,000 |
| Adjusted basis | $108,000 |
| Taxable gain | $442,000 |
That gain gets taxed in layers. The depreciation piece is called “unrecaptured section 1250 gain,” and it’s taxed like regular income but capped at 25%. Assuming the full cap, that’s $48,000.
The remaining $250,000 is ordinary appreciation, taxed at long-term capital gains rates of 0%, 15%, or 20%. At 15%, that’s $37,500. Then comes the 3.8% net investment income tax, which hits investment income once modified adjusted gross income passes $250,000 for joint filers ($200,000 for most single filers). Here it adds $11,096.
Total federal bill: about $96,596. Worse, he never got the $192,000 in deductions. If he’d been in the 22% bracket, those write-offs would have been worth about $42,240 in tax savings over the years. He paid full freight while he owned it, and he still owes the recapture now. One quiet IRS rule, six figures gone: we listed this one and eight others retirees routinely trip over in a free tax trap guide.
A Single Form Can Recover the Missed Deductions
One filing can cover two decades of missed depreciation. Skipping depreciation is treated as using the wrong accounting method, and the fix is Form 3115, Application for Change in Accounting Method. It lets him claim all the missed depreciation as one catch-up deduction, called a Section 481(a) adjustment, on a single current return.
The best window is the tax year before the sale or the year of the sale, as that deduction directly offsets the recapture he can’t avoid. The best move would be to hire a CPA or enrolled agent for this one. The form is technical, and how much the catch-up saves depends on how it lines up with his other income and the passive-loss rules for rentals.
Why Holding Beats Selling for Many 70-Year-Olds
Two alternatives deserve a hard look before he lists the house:
- A like-kind exchange. Under Section 1031, he can trade into another investment property and recognize no gain. The deferred tax carries over to the new property, and he remains a landlord.
- Holding until death. Heirs get a basis equal to fair market value at the date of death, and the recapture rule doesn’t apply to a transfer at death. Both the $442,000 gain and the recapture disappear. Estate tax only enters the picture above a $15,000,000 basic exclusion for 2026 deaths.
If he doesn’t need the cash and the kids will inherit, holding wins, and a property manager can take over the landlord work. If he needs the money or wants out, filing Form 3115 before the sale keeps the catch-up deduction.
Get One Number From a Preparer Before Listing
Before he signs with a listing agent, he should ask a preparer for his adjusted basis: purchase price, plus improvements, minus every dollar of depreciation he was allowed. That one figure drives the size of the bill, shows how big the catch-up deduction can be, and tells him whether holding beats selling.
Avoid assuming that skipped depreciation means no recapture. The IRS taxes it as if he took it, so he might as well get the deduction.
Contact [email protected] for any questions or corrections.
David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
