The depreciation that sheltered your income along the way gets accounted for at sale. It lowered your cost basis, so you're taxed on a bigger gain than the raw purchase-to-sale difference suggests. Walk through an illustration: - You buy at $375,000: $100,000 of land, $275,000 of structure. - Over the holding period you depreciate $175,000 of that structure. - Your adjusted basis drops from $375,000 to about $200,000. - You sell for $500,000. The taxable gain is measured against that reduced $200,000 basis, so you're taxed on roughly $300,000 rather than the $125,000 you might expect from purchase price to sale price. In practice, the depreciation you took each year is effectively recaptured and taxed at sale, often at a different rate than the rest of the gain. That's the trade for the deductions you enjoyed along the way. This is also exactly the outcome a 1031 exchange defers. Roll the proceeds into a replacement investment property instead of cashing out, and the tax bill keeps waiting. The numbers and rates here are situation-specific and the rules change, so run your actual figures with a tax preparer who knows real estate before you rely on any example, including ours.