What Is Recapture When I Sell a Rental?
The reversal of depreciation you claimed in earlier years, added back to income when the property sells for more than its depreciated value. It is fully taxable as ordinary income, unlike the capital gain on the same sale, which is only half included.
- The answer:: The sale produces recapture up to the original cost and a capital gain on anything above it, taxed differently.
- The trap:: Expecting only a capital gain. Recapture is fully included, so the effective tax on the sale is much higher than half the gain.
- The recommendation:: Weigh each year's depreciation claim against the recapture year's likely rate, because deferral into a higher rate loses money.
Where the AI summary above gets this wrong
"When you sell a rental property you pay tax on half the capital gain."
That's surface-true. Here's what it misses:
- Recapture comes first — Depreciation claimed in prior years is added back to income in full before any capital gain is calculated.
- The two amounts are taxed differently — Recapture is fully included as ordinary income; the capital gain above original cost is half included.
- It all lands in one year — Both amounts fall in the year of sale, which commonly pushes a retiree into the top bracket and past the OAS threshold.
01 The two amounts a sale produces
Where a rental property sells for more than its undepreciated capital cost, the depreciation previously claimed is recaptured and added back to income in full. Where it sells for more than its original cost, the excess above original cost is a capital gain, half of which is included.
So a property bought for four hundred thousand, depreciated to three hundred and fifty, and sold for six hundred produces fifty thousand of recapture as ordinary income and two hundred thousand of capital gain, half included.
Source: Capital gains (line 12700)
02 Why recapture hurts more
Recapture is fully included, so a dollar of it costs twice what a dollar of capital gain costs at the same marginal rate. It is also unavoidable once the depreciation has been claimed, since the sale price is what it is.
The deduction that created it was taken at whatever rate applied in those years, often while the owner was working. If the recapture year lands at a similar or higher rate, the whole exercise moved tax rather than saving it — the deduction side is in rental income in retirement.
Shows: what a given amount of additional taxable income costs you in tax at your marginal rate, and what you keep. Ignores: provincial surtaxes, credits that phase out with income, and any effect on income-tested benefits.
Source: Capital gains (line 12700)
03 What lands in the sale year
Recapture, the taxable capital gain and any accrued rent all fall into the same taxation year. For a retiree that is often the single largest income year of their retirement, arriving after the point at which income-tested benefits matter.
The Old Age Security recovery tax follows a year later, deducted from payments across the following July to June, which is a cash-flow effect long after the proceeds have been spent — the timing is in how the recovery tax is collected.
Selling on an instalment basis, with the proceeds received over several years, allows a capital gains reserve to spread the gain across up to five taxation years. The recapture cannot be spread that way, but the gain portion can, which is often enough to keep a sale year out of the top bracket. The calculation is done class by class of depreciable property, and the building, the furnishings and the improvements can fall into separate classes each carrying its own recapture.
The depreciation was claimed at forty percent while working and the recapture arrives at fifty-three percent in a sale year that also triggers a clawback. That is not a deferral; it is a transfer of tax from a cheaper year to a more expensive one.
FAQ
What is recapture on a rental property?
The reversal of depreciation claimed in earlier years, added back to income in full when the property sells for more than its depreciated value.
Is recapture taxed like a capital gain?
No. Recapture is fully included as ordinary income, while a capital gain above the original cost is only half included, so recapture costs roughly twice as much per dollar.
Should I avoid claiming depreciation?
Compare the rate at which the deduction saves tax now against the likely rate in the year of sale. Deferring into a higher-rate year loses money rather than saving it.
Sources
Regulator references
- Capital gains (line 12700) · Canada Revenue Agency · 2025How capital gains and losses are calculated, reported and carried.Last verified: 2026-09-07
- Canadian income tax rates for individuals · Canada Revenue Agency · 2025The federal and provincial rate brackets a withdrawal is taxed against.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.