Why can selling a rental property create both a capital gain and recapture?

Arsen Accounting Services · Question 151 · Sources checked October 29, 2026

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A rental sale can involve two different calculations: the gain on the property and the recovery of depreciation previously deducted. That second amount is called recapture of capital cost allowance. Looking only at the purchase price and sale price can miss it.

Separate land, building, and tax history

Land is not depreciated like a rental building. The sale proceeds and original costs therefore need a supportable allocation. The building's undepreciated capital cost reflects earlier CCA claims and other adjustments, which can create recapture when the property is sold.

Recapture is included in income under the CCA rules; it is not simply another capital gain. Depending on the facts, a terminal-loss analysis may also be required. Special allocation rules can apply when land and buildings are disposed of together.

Official guidance: [1], [2].

Estimate before spending the sale proceeds

For example, two landlords sell similar properties for the same gain, but only one claimed substantial CCA. Their taxable results may differ. The mortgage payout does not establish the amount of gain or recapture.

Gather the complete sale file

• Original closing statement and purchase allocation.
• Capital improvements and prior CCA schedules.
• Sale agreement, closing adjustments, and selling expenses.
• Ownership percentages and any changes in property use.

Ask for a tax estimate before distributing or reinvesting all the cash. Include all years of depreciation rather than only the last return. If a co-owner has different records or a corporation owns part of the property, reconcile the ownership and tax history before the sale is reported.