Yes. When you sell the entire rental in a fully taxable sale to an unrelated buyer, every suspended passive loss sitting on that property is released in the year of the sale, and those losses offset the recapture income on the same return. The deduction a cost segregation study created years ago does not evaporate because you could not use it then. It waits, and comes due exactly when the recapture bill shows up.
That is the short answer. The useful part is which slice of recapture the losses offset, and when the release does not happen.
Why the losses come free when you sell
A big first-year deduction from a study often cannot be used immediately. Without real estate professional status or short-term rental treatment, the rental is passive, and a passive loss can only offset passive income. The unused amount is not lost; it carries forward on Form 8582 as a suspended loss attached to that activity.
Under §469(g), a fully taxable disposition of your entire interest in the activity to an unrelated party releases those suspended losses in full. They stop being passive-limited and become ordinary deductions on that year's return. Separately, the gain on the sale is itself passive income, so it can absorb suspended losses from your other passive activities as well.
So the sale year produces two things at once: recapture income, and a pile of deductions that were waiting for it.
A worked example: a $620,000 rental sold in year four
Say you bought a single-family rental for $620,000 all in, with 80% treated as depreciable basis after excluding land. That is $496,000.
A residential cost segregation study reclassifies roughly 22% of that basis into 5-, 7-, and 15-year property, about $109,000. With 100% bonus depreciation available for property acquired (contract signed) and placed in service after January 19, 2025, that $109,000 is deductible in year one. At a 32% marginal federal rate that is roughly $34,900 of year-one federal tax savings — except that your other income is all W-2 and none of it is passive, so $84,000 of the loss gets suspended.
Over the next four years you also take straight-line depreciation on the remaining basis, roughly $56,000. Total depreciation taken is about $165,000, so your adjusted basis is around $455,000.
You sell in year four for $700,000. Gain is about $245,000, and it splits three ways: roughly $109,000 of §1245 recapture on the short-life components, taxed as ordinary income; roughly $56,000 of unrecaptured §1250 gain, capped at 25%; and the rest long-term capital gain.
Now the released losses go to work. The $84,000 of suspended loss is an ordinary deduction, so it lands against the ordinary slice first and wipes out most of the $109,000 of §1245 recapture. At a 32% rate, that is roughly $26,900 of federal tax you do not pay in the sale year. The recapture did not undo the study; the suspended loss was the hedge all along.
Which slice of recapture do the losses actually offset?
This is where the value is decided. Released passive losses are ordinary deductions, so they are worth the most against ordinary income — and §1245 recapture on the 5-, 7-, and 15-year components a study identifies is ordinary income, taxed at your marginal rate. Offsetting a dollar of that at 32% or 35% saves more than offsetting a dollar of unrecaptured §1250 gain, which is capped at 25%.
The part of the recapture people fear most, the ordinary-rate §1245 slice, is the part a suspended loss carryforward shelters best. If you want the mechanics of that split, read whether depreciation recapture is ordinary income or capital gains.
Three situations where the losses are not released
The release in §469(g) is conditional, and each condition trips someone up:
You sold to a related party. A sale to a related person is not a qualifying disposition; the losses stay suspended until that person sells to an unrelated buyer.
You gifted it instead of selling. A gift is not a taxable disposition, so there is no release: the losses are generally added to the recipient's basis and you never deduct them. More on that in what gifting a rental does to recapture.
You sold on an installment basis, or sold only part of it. With seller financing, the losses release in step with the gain you recognize each year. And selling one of two rentals releases only the losses attached to that activity, unless you grouped them.
What this means for a sale closing this December
Timing matters because the release and the recapture have to land in the same year to net cleanly. A sale that closes December 29 puts both on this year's return. One that slips to early January moves both to next year's — fine, as long as you are not counting on this year's numbers.
What is not fine is assuming the netting means you owe nothing. The offset reduces taxable income, not your withholding, and the §1245 slice can still leave a balance that triggers an underpayment penalty. If a closing is on the calendar, see whether you need an estimated payment after a rental sale before year end rather than in April.
If you are weighing a study on a property you may sell
The common worry — "why accelerate depreciation if I will just recapture it" — mostly answers itself here. For a passive investor the deduction either cuts tax in year one or banks a suspended loss that returns at sale, against the highest-taxed slice of the gain. What is worth modeling is your marginal rate then versus now, not whether the deduction survives.
Our reports lay out the component detail your preparer needs to compute the §1245 and §1250 split at sale, so the netting is documented rather than estimated. If you want to see whether a study pencils on your property at all, the savings estimate takes two minutes and will tell you honestly when it does not.