Is there bonus depreciation recapture when the fund makes a sale?

The deduction lowered basis, so the sale gives it back as ordinary income

Section 168(k)(1)(B) reduces the basis of qualified property by the bonus deduction before any other depreciation is computed. A component written off in full has a basis of zero, so whatever part of the sale price is allocated to it is gain.

Section 1245(a)(1) taxes that gain as ordinary income to the extent of the lower of recomputed basis, which adds the depreciation back, or the amount realized, minus adjusted basis. In practice, gain on a fully expensed component is ordinary up to the deduction taken, and only gain above the original cost is section 1231 gain.

The client's accelerated depreciation funds page describes the strategy as front-loading deductions through cost segregation. The other side of that front-loading is this recapture, and it is why the deduction is better understood as timing than as a permanent saving.

Your K-1 splits the fund's gain into three layers with three different rates

The fund reports the sale on its own Form 4797 and passes your share through. The Instructions for Form 4797 route section 1245 recapture through Part III, with the ordinary portion separated from the section 1231 gain.

• Section 1245 recapture on the bonus components: ordinary income, at 2026 rates up to 37% on joint taxable income over $768,700 under Rev. Proc. 2025-32.
• Unrecaptured section 1250 gain on the straight-line building depreciation: capital gain taxed at a maximum 25% under section 1(h).
• Remaining appreciation: section 1231 gain, generally taxed at the 0%, 15% or 20% long-term rates, with the 3.8% net investment income tax where it applies.

Selling your fund interest does not avoid the recapture

Section 751(a) treats the part of a partnership interest's sale price attributable to unrealized receivables as received for property that is not a capital asset. Section 751(c) includes in unrealized receivables the section 1245 recapture the partnership would have if it sold the property at fair market value.

The building layer follows you too. Reg. Section 1.1(h)-1 looks through a partnership interest sold after more than a year and counts your share of the fund's section 1250 capital gain as unrecaptured section 1250 gain.

The release side is real, however. On a fully taxable disposition of your entire interest, section 469(g) frees passive losses that were suspended, which can absorb some of the gain.

A hypothetical 5% interest shows how the recapture reaches you

Assume a hypothetical fund buys a property for $10,000,000, and a cost segregation study assigns $2,000,000 to components that take 100% bonus depreciation. Five years later it sells for $11,000,000, with $1,500,000 of the price allocated to those components.

The components' basis is zero, so $1,500,000 is section 1245 ordinary income; it is below the $2,000,000 originally deducted. An investor with a 5% interest receives $75,000 of ordinary income on the K-1, plus a share of the building and land gain.

Five years earlier that investor's share of the bonus deduction was $100,000, which may have offset passive gain then. Whether the trade was worth it depends on the rates at each end and what the money earned in between. These are rounded, hypothetical figures, so have your CPA model your actual sale.

A fund-level exchange or a long hold can postpone the bill

A partnership can complete its own like-kind exchange; the Form 1065 instructions ask whether the partnership engaged in one and distributed the replacement property. Whether a fund will exchange rather than sell depends on its operating documents, so ask.

An exchange does not erase section 1245 recapture automatically. Section 1245(b)(4) limits recapture in an exchange to the gain recognized plus the value of property received that is not section 1245 property, so the replacement's makeup matters, as explained in section 1245 recapture on real estate.

Before investing, read how the fund plans to exit, model the recapture against who a fund suits, and compare it with deferring your gain in an exchange instead; see how much of a gain a fund can offset and bonus depreciation versus a 1031.